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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[_]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended: October 3, 1998
OR
[X]Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from January 1, 1998 to October 3, 1998
Commission File Number 000-25071
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INFOSEEK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0494507
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1399 Moffett Park Drive 94089
Sunnyvale, California 94089 (zip code)
(address of principal executive
offices)
Registrant's telephone number, including area code: (408) 543-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value; Preferred Share Purchase Rights (Title of Class)
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Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 5, 1999, was $1,865,306,874 based upon the last
sales price reported for such date on The Nasdaq Stock Market. For purposes of
this disclosure, shares of Common Stock held by persons who hold more than 5%
of the outstanding shares of Common Stock and shares held by officers and
directors of the registrant, have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
At February 5, 1999 registrant had outstanding 61,170,296 shares of Common
Stock.
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EXPLANATORY NOTE
This Transition Report on Form 10-K contains certain forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended) that are subject to risks and uncertainties. These forward-looking
statements are typically denoted in this Report by the phrases "anticipates,"
"believes," "expects," "plans" and similar phrases. Actual results and the
timing of certain events could differ materially from those projected in the
forward-looking statements as a result of certain known and unknown factors,
including the Risk Factors beginning on page 18 of this Report and other
factors discussed elsewhere in this Transition Report on Form 10-K.
On November 18, 1998, Infoseek entered into a significant transaction with
The Walt Disney Company. In this transaction, Infoseek acquired Starwave
Corporation from Disney and formed a holding company, incorporated in
Delaware, for purposes of holding the capital stock of Infoseek Corporation, a
California corporation, and Starwave.
In this Transition Report on Form 10-K, references to Infoseek on or after
November 18, 1998 are references to Infoseek Corporation, a Delaware
corporation and its subsidiaries, and references to Infoseek prior to November
18, 1998 are references to Infoseek Corporation, a California corporation.
When necessary for clarity, Infoseek Corporation, a California corporation, is
referred to as "Infoseek California" and Infoseek Corporation, a Delaware
corporation is referred to as "Infoseek Delaware." References to "Disney"
refer to The Walt Disney Company and its affiliated companies. References to
the "ABCNews Joint Venture" and the "ESPN Joint Venture" refer to joint
ventures Starwave maintains with affiliates of Disney and ESPN, respectively.
The ABCNews Joint Venture and the ESPN Joint Venture are together referred as
the "Joint Ventures."
On January 28, 1999, Infoseek changed to a fiscal year with 52 or 53 week
periods ending on the Saturday nearest September 30. As a result, pursuant to
the rules of the Securities and Exchange Commission, this Transition Report on
Form 10-K presents financial information for the nine month period ending
October 3, 1998 and prior periods. The results of operations and cash flows of
the Company for the nine months ended October 3, 1998 contained 276 days and
compare to 273 days for the unaudited results of operations and cash flows for
the nine months ended September 30, 1997.
Because prior to November 18, 1998 Infoseek Delaware was a wholly owned
subsidiary of Infoseek California that was created for purposes of conducting
the transactions described above, Infoseek Delaware, the Registrant with the
Securities and Exchange Commission, did not conduct business activities in the
nine month fiscal period ended October 3, 1998. Since November 18, 1998,
Infoseek Delaware's business has primarily consisted of holding the capital
stock of Infoseek California and Starwave. Accordingly, although the
transaction with Disney did not occur until November 18, 1998, for purposes of
comparison this Transition Report on Form 10-K presents, separately,
historical information as of and for the nine month fiscal period and prior
periods for Infoseek California and for the twelve months ended October 4,
1998 and prior periods for Starwave. The acquisition of Starwave has been
accounted for under the purchase method of accounting and the financial
positions, results of operations and cash flows of Infoseek and Starwave will
be presented on a combined basis beginning November 18, 1998, the date that
the purchase was consummated. As a result, information presented herein may
not be directly comparable to combined results in subsequent quarters.
TRADEMARKS
Infoseek, the Infoseek logo, Ultraseek, Ultramatch, Quando and Starwave are
among the registered trademarks of Infoseek. This Transition Report also
refers to other trademarks of Infoseek and other companies.
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PART I
ITEM 1. BUSINESS
Infoseek is a leading provider of Internet services and software products.
Infoseek produces GO Network (home page: go.com) and the Infoseek Service
(home page: infoseek.go.com), comprehensive Internet gateways that combine
branded content from media leaders, search and navigation with directories of
relevant information sources and content sites, community applications for
communicating shared interests such as chat and instant messaging, and which
facilitate the purchase of related goods and services. Infoseek is able to
segment users by interest area, providing advertisers with focused and
targeted audiences. GO Network and the Infoseek Service include Infoseek
Search, Infoseek's advanced Internet search and directory technology.
Additionally, Infoseek produces other leading Internet sites, including
ABCNEWS.com and ESPN.com in partnership with Disney affiliates. Infoseek also
sells Ultraseek Server, a leading Internet and intranet software search
product. Infoseek's products and services use the World Wide Web to empower
users to make their lives easier.
Background
Infoseek was incorporated in August 1993 in California to develop products
and services that enable users of all experience levels to find and use
content and information on the Internet. From 1995 through January 1999,
Infoseek's principal product was an earlier version of the Infoseek Service
(then located at infoseek.com), which contained earlier versions of Infoseek
Search. In October 1997, Infoseek enhanced the Infoseek Service and added easy
to navigate "channels" (now called "centers" and numbering 18) that integrated
search results with relevant information, services, products, and communities
on the Internet. Infoseek also began marketing the Ultraseek Server software
product in March 1997.
In April 1998, Infoseek acquired WebChat Communications, Inc., a developer
of chat and home page applications. The technology from WebChat was used to
enhance the Infoseek Service and later GO Network.
On November 18, 1998, Infoseek acquired Starwave Corporation from Disney,
reincorporated into Delaware and entered into various agreements regarding a
significant strategic relationship with Disney relating to the development and
commercialization of GO Network. See "--Relationship with Disney."
In January 1999, Infoseek launched GO Network and enhanced the Infoseek
Service. GO Network and the Infoseek Service contain similar unique content,
features and graphics. Infoseek expects to transition users from the Infoseek
Service to GO Network, which includes all of the Infoseek Service
functionality, and may redirect all traffic from infoseek.com and
infoseek.go.com to the GO Network home page at go.com.
Also, in January 1999, Infoseek acquired Quando, Inc., a creator of
constantly-updated directories of information obtained from the Internet,
including shopping guides, event guides, contact directories, and website
rating guides. Infoseek had previously purchased services from Quando.
Quando's technology is being used to enhance the information on GO Network and
the Infoseek Service.
GO Network and the Infoseek Service
Infoseek launched the premiere version of GO Network and an enhanced version
of the Infoseek Service, with a user interface similar to GO Network, in
January 1999 and expects to develop and launch additional features for these
services throughout 1999. Both services are Internet portal sites that combine
the enhanced version of the Infoseek Service with the content of ABC.com,
ABCNews.com, ESPN.com, Disney and others. The services are destination sites
for users seeking quality media content from some of the most popular Internet
sites and also provide easy access to information throughout the Internet.
The services offer users six principal means of obtaining information--the
GO Network and Infoseek Service home pages, centers, Infoseek Search, Web page
directories, communities and commerce--from which
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users can launch specific queries, browse or access relevant content. For
example, a user who is interested in professional baseball can obtain the
latest sports scores, standings and analyses, search for websites on a
favorite player, talk with other baseball fans in a chat room, order books and
videos on baseball from an Infoseek partner, review and search news headlines
for stories on player contract negotiations, and access other information and
activities.
In addition, the services also provide direct access to key, GO Network
partners like ESPN.com, ABCNews.com and Mr. Showbiz.com, which are produced
through joint venture partnerships between Infoseek and Disney affiliates.
GO Network and the enhanced Infoseek Service were designed to meet three key
needs of Internet users in accessing Internet content and contain several
unique features to meet these needs:
Simplicity: The features of the services allow users easy access to
information content and commonly used key tasks. Through universal
navigation, users can access information across the respective services
quickly and easily. In addition, GO Network offers universal registration,
which allows users to register one time for all services on the network.
Control: The services incorporate several features that allow users to
control navigation on the site through the use of "Follow-Me Tabs,"
personalization and a filter designed to limit adult and other unwanted
content from search results called GOguardian.
Confidence: Through GO Network partners and the features of the Infoseek
Service, users have access to established media content and Internet brands
like ABC, ESPN, Disney and Infoseek.
GO Network is also focused on building Internet communities, offering
several services that allow users to communicate with each other and conduct
commerce over the Internet.
GO Network and Infoseek Service Content
Home Pages
The home pages of the services can be customized by the user and offer
constantly updated news headlines, weather, stock market information, sports
scores, horoscopes and lottery results. The home pages also offer links to
commonly used services like phone and email directories, maps, TV listings,
CD, book and video purchasing, among others.
Centers
The services offer users 18 "centers" which are organized topically much
like sections of a newspaper. Current centers include Automotive, Business,
Careers, Communications, Computer, Entertainment, The Good Life, Health,
Internet, Kids, Family, News, Money, Real Estate, Shopping, Sports, Travel and
Women's.
Each center includes access to subtopics, unique information, Web search and
directory through Infoseek Search, news headlines and stories, chat,
transaction opportunities and classified advertisements. In partnership with
Disney, Sports, News, Entertainment, Family and Kids centers now include
content from ABC.com, ABCNews.com, Mr. Showbiz, Disney Online, Family.com,
ESPN.com and other partner sites. This established branded content provides
both a superior experience to users and builds users' confidence in the
services.
Infoseek Search
The services include Infoseek Search, a leading query-based search service.
Infoseek Search allows the user to launch query-based searches of the Web,
USENET News and other premium content databases, including news and company
collections. To perform a search, a user types a query (words, phrases or full
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text) in the search box from anywhere on GO Network or the Infoseek Service
and is then presented a highly specific response from a search of the entire
database (limited by GOguardian when enabled). Infoseek Search includes Extra
Search Precision, which is designed to improve the quality of search results
by delivering the most relevant results on the Internet. Infoseek Search also
includes a function that allows users to control the specificity of their
search and utilizes sophisticated techniques to allow users to obtain specific
results for case sensitive, numerical or singular letter aspects of certain
queries, such as "49ers" or "Vitamin C."
Web Page Directory
In addition to search, the services also include a hierarchical listing of
Web pages that have been selected, abstracted and organized by category, which
can be accessed by conducting an Infoseek Search on the services' home pages
or by selecting the "Web Sites" Follow-Me Tab in a center. Users receive a
hierarchy of relevant Internet sites for areas of interest. For example, under
Sports, the user can proceed from "Baseball" to "Major League Baseball" to
"Players," and finally, to "Ken Griffey Jr." The directory assists the user by
providing abstracts of each directory entry. At the end of 1998, Infoseek's
directory included approximately 1,000,000 websites.
Communities
To enrich users' experiences, the services allow users to interact with
users of similar interests. Users who wish to interact with each other may
take advantage of various free services on GO Network and the Infoseek Service
including:
. chat rooms and message boards,
. instant messaging between users,
. personalized home pages, and
. transaction based web sites.
Commerce
The shopping center on the services currently provides users with tools to
find what they are looking for from hundreds of online sources and to compare
features, price and store policies on the items they wish to buy. Infoseek
plans, in the future, to allow users to search and select products from a wide
range of merchants and allow users, through participating merchants, to place
items in a universal "shopping cart" that is linked to the registration
features of GO Network and the Infoseek Service.
Information Sources
The services offer users access to information feeds from a variety of well-
known Internet sources, third party content sources and co-branded sites
between the services and other providers of services and products. These
arrangements provide users with high quality, up-to-date information whether a
user is navigating via search, centers or directory. For example, news that is
relevant to the user's query is made available as part of a search result. In
addition, the News center offers users the latest business, world, political,
and technology news from ABCNews.com and is supported by feeds from a variety
of data sources such as Reuters, Business Wire, Hoover's, PR Newswire and
USENET news groups. The Sports center also offers users sport news and scores
from ESPN.com.
Features of GO Network and the Infoseek Service
Universal Navigation
GO Network and the Infoseek Service feature common graphics and
presentation, which allow users to quickly move among information and
services. In addition, a universal GO Network navigation bar appears on
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all of the branded partner sites in GO Network, which allows users to easily
move between the GO Network home page, Infoseek Search, and GO Network's News,
Money, Entertainment, and Family centers by simply clicking on the labeled
links. For example, a user on the ESPN.com website can, at any time, go
directly to the News center to review and search recent headlines by simply
selecting "News" at the top of the screen. In addition, Disney has agreed to
use best efforts to integrate Infoseek's search and directory technology into
its own Internet-based services.
Follow-Me Tabs
The services employ an innovative tab-based navigation scheme that allows
the user to navigate through different services, yet still remain in the
context of their chosen subject. For example, when users visit the Sports
center to find information about the San Francisco Forty Niners, they can then
click on the "Web Directory" tab and find a comprehensive list of related
websites, or click on the "Community" tab to find a Forty Niners chat group.
Universal Registration
GO Network has a single, simple registration process allowing users the
advantage of registering once anywhere on GO Network. Users of the Infoseek
Service may also register on GO Network. Once registered, users are registered
on all GO Network and Infoseek Service services and have immediate ability to
customize content and services throughout GO Network and the Infoseek Service.
Universal Personalization
Once a user is registered, GO Network builds a personal profile for each
user. As users choose to share more information about what they need and want
and use GO Network premium services, GO Network and the Infoseek Service
customize content to assist users in locating information more quickly. For
example, once users enter their zip codes to obtain local weather, the system
retains this information to customize other local services the customer may
request in the future, such as TV listings, restaurant guides and local
events.
Go Guardian and Security
In order to allow users to block inappropriate and unwanted adult content,
GO Network and Infoseek Service offer an optional screening technology called
GOguardian. This technology is designed to limit Internet search results for
minors to appropriate material. In addition, GO Network has developed clear
policies for the registration of minors, automatically notifies parents or
guardians when minors register, and provides clear warnings when adult
material is about to be displayed.
The services also maintain stringent privacy and access policies, use
aggressive efforts to filter unsolicited e-mail (or "spam"), offer clear
registration guidelines for children and notify parents regarding minors'
website use.
The ESPN and ABCNews Joint Ventures
Infoseek, as part of its relationship with Disney, also produces broad
consumer appeal Internet services in specific content areas. Through the Joint
Ventures that Infoseek maintains (through Starwave) with affiliates of Disney
and ESPN, Infoseek produces prominent sports, news and entertainment Internet
services, both as part of GO Network and the Infoseek Service and at separate
website addresses. In conducting these activities, the Joint Ventures seek to:
. provide comprehensive, entertaining programming that is constantly
updated,
. leverage their association with high-profile brands, including ESPN, ABC,
the NBA, the NFL and NASCAR,
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. utilize and develop leading-edge technology that offers consumers
advanced and entertaining services, and
. provide an attractive platform for mainstream, consumer-oriented
advertisers.
The Joint Ventures also generate merchandising revenue through online sales
and transactions in ESPN The Store within ESPN.com and the NBA Store within
NBA.com.
The Joint Ventures derive their content from their staffs, partners,
licensees, news services and freelance writers and commentators. The Joint
Ventures add additional value by converting this content into interactive
programming.
ESPN Joint Venture
The ESPN Joint Venture's flagship service is ESPN.com, which provides unique
sports-related content. Content from ESPN.com is available in the Sports
center and ESPN.com is a part of the GO Network. The ESPN Joint Venture also
produces other sports services, including NBA.com, NFL.com, and NASCAR Online.
ABCNews Joint Venture
The ABCNews Joint Venture's flagship service is ABCNews.com, which provides
a broad variety of news and information, including world, national,
entertainment, health, technology and business news and information. The
ABCNews Joint Venture's other wholly owned services include Mr. Showbiz, which
provides entertainment news, Wall of Sound, which provides music news,
CelebSite, which provides celebrity information, and Moneyscope, an ABCNews
web service that provides financial information. Content from ABCNews.com is
available in the News centers, and ABCNews.com and Mr. Showbiz are part of GO
Network.
Joint Venture Agreements
As amended following Infoseek's acquisition of Starwave, the Joint Ventures
have terms of ten years from November 18, 1998 and are mutually exclusive with
regard to U.S. and Canadian based online sports and general news services,
respectively. Required funding and profits/losses under the Joint Ventures are
split 60/40 between the Starwave and Disney entities in loss years and 50/50
in years in which the respective Joint Ventures achieve net income. Under the
Joint Ventures:
. Infoseek provides a variety of services, including hosting, technology
development, usage tracking, infrastructure, production support, software
tools and engines.
. ESPN provides access to ESPN television and radio creative and editorial
content, advertising and promotion on ESPN cable television and radio
networks and access to the "ESPN" brand, properties and personalities.
. Disney provides access to ABC News creative and editorial content,
advertising and promotion on ABC News programs, and access to the "ABC
News" brand, properties and personalities.
. Each of the Joint Ventures is accounted for under the equity method,
since neither Infoseek nor Starwave have a majority voting interest.
Representation Agreements
In connection with the acquisition of Starwave and its interest in the Joint
Ventures, Infoseek (through Starwave) has agreed to act as a representative of
the Joint Ventures for the sale of advertising and related services for the
Joint Ventures.
Under representation agreements by and among Infoseek, Starwave and each of
the Joint Ventures entered into in conjunction with the acquisition of
Starwave, Starwave is engaged by the Joint Ventures on an exclusive basis in
the sale of advertising and other items as designated or approved by the Joint
Ventures and to provide additional services, if any, as the Joint Ventures may
request. Activities with respect to the sale of advertising on
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the Internet and other related items include the negotiation, execution,
renewal, amendment, modification or termination of advertising and other
related contracts. Starwave guarantees to the Joint Ventures a minimum
quarterly payment equal to the number of projected page views, multiplied by
80%, multiplied by a minimum revenue rate. The minimum revenue rate is based
on the average advertising revenue rate per page view of publicly traded
Internet companies involved in activities comparable to those of the Joint
Ventures. If a mutually agreeable rate cannot be determined, then the rate
will be based on the Joint Ventures' 12 month trailing average. Starwave is
also obligated to pay the Joint Ventures for actual revenues billed to third
parties for services less Starwave's actual and reasonably allocated costs of
providing the services, plus a profit margin of 5% of costs should these
actual revenues be greater than the guaranteed minimum payment.
Starwave recognizes revenue on the sale of advertising and other related
items of the Joint Ventures due to its obligations under the representation
agreements. Starwave bears the risk of loss if it fails to bill and collect
amounts sufficient to cover its contractual guaranteed minimum payments. Each
of the Joint Ventures is accounted for under the equity method since neither
Infoseek nor Starwave have a majority voting interest.
The ESPN Joint Venture has introduced subscription services on ESPN.com,
including a premium subscription, which provides enhanced coverage, special
editorial features, in-depth statistics and graphical analysis and access to
additional multimedia content, as well as a one-time subscription, which
provides access to fantasy games such as Fantasy Baseball and Fantasy
Football. These are included in the services provided under the representation
agreement with the ESPN Joint Venture.
Ultraseek Server and Software Products
In March 1997, Infoseek introduced Ultraseek Server, a search software
product targeted at the corporate market. Designed as an easy-to-install,
simple-to-manage spider and search engine, the product utilizes the core
technology developed for Infoseek Search, such as natural language searching,
relevance ranking and automated revisiting of directory information. See "--
Technology."
Ultraseek Server also features an intuitive interface, support for alternate
document formats such as Microsoft Office or Adobe PDF, and robust error
recovery. Ultraseek Server is therefore a solution for corporate webmasters
that enables the creation of a search capability on one site or across a
network with thousands of hosts, that is quick to implement and manageable
with limited resources. In November 1998, Infoseek released its Content
Classification Engine (Ultraseek Server CCE), an automated tool for organizing
content into categorized topics.
Infoseek views the Ultraseek Server product as a horizontal application,
with a strong fit across many industries. Since 1997, Infoseek has licensed
Ultraseek Server software to over 1,000 customers, including industry leaders
in publishing, technology, manufacturing, communications, government, finance,
consumer products and education. Among the many licensees of Ultraseek Server
are: Sun Microsystems, Inc., Hewlett- Packard, Morgan Stanley Dean Witter, the
U.S. Department of Transportation, the New York Stock Exchange, Sony
Corporation, and Stanford University. Infoseek has also been selected as the
intranet and public site search application utilized by CERN, the European
Particle Physics Lab and creator of the World Wide Web. During the nine months
ended October 3, 1998, approximately 11% of Infoseek's total revenues related
to the sale of its Ultraseek software licenses and support. Infoseek expects
this percentage of total revenues to decrease to below 10% in fiscal year 1999
due to the acquisition of Starwave.
Ultraseek Server products are distributed directly over the Internet and
through value-added-resellers who provide installation and customization
services. The products are licensed, with the price depending on the number of
items in the database.
Customer Support and Software Upgrades
Infoseek provides telephone user support for its products and services,
including GO Network, the Infoseek Service and its software products. Support
for GO Network and the Infoseek Service is provided at no cost to users. For
Ultraseek Server, users can pay a maintenance fee which provides support
services and upgrades of new releases.
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Advertising Services and Products
Infoseek derives a substantial majority of its revenues from the sale of
advertisements. Infoseek is focused on providing its advertisers with high
volume and targeted access to interested audiences and potential buyers. These
advertisements appear on the Infoseek Service and GO Network, when a viewer
enters the services, accesses a center, receives search results from Infoseek
Search or browses through the website directory. Infoseek also sells
advertising for the Joint Ventures' services, consisting primarily of "banner"
advertisements which appear throughout the services at different times,
pursuant to the representation agreements, and shares revenues from the Joint
Ventures with its partners in the Joint Ventures.
Advertising revenues on the Infoseek Service, without giving effect to the
acquisition of Starwave, represented 89%, 94%, 94% and 99% of Infoseek's total
revenues for the nine months ended October 3, 1998, the nine months ended
September 30, 1997 and the years ended December 31, 1997 and 1996,
respectively. Prior to its acquisition by Infoseek, a substantial portion of
Starwave's revenues were derived from web hosting services and from the Joint
Ventures. Infoseek expects that its advertising revenues, including
advertising revenues received from the Joint Ventures, will continue to
constitute a substantial part of Infoseek's aggregate revenues in the future.
Infoseek believes that it has been able to achieve its advertising revenues
to date primarily through its direct sales force and through the products it
offers advertisers. Infoseek also believes that its success in obtaining
advertising revenue is primarily the result of, and highly dependent on, high
consumer traffic, favorable demographics and innovative marketing approaches.
Advertising Products and Pricing
Infoseek derives its revenue from several advertising options that may be
purchased individually or in packages--run of site rotations, directory and
center rotations, keyword rotations, cross service sponsorship, center
sponsorship and Ultramatch targeting. These options may contain hypertext
links to the advertiser's home page. Infoseek sells advertisements for display
on both GO Network and the Infoseek Service, as well as the Joint Ventures.
Rotations
Run of Site: Run of site rotations are advertisements that rotate on a
random basis throughout GO Network and/or the Infoseek Service, appealing
to advertisers seeking to establish brand recognition across the broadest
reach of the services. Search results advertisements are typically sold in
blocks of one thousand impressions to be generated over a four week period.
Infoseek's current cost per one thousand impressions, known as "CPM," for
run of site rotations ranges from $18 to $29 depending upon the number of
impressions purchased.
Directory and Center: Directory and center rotations are advertisements
that appear when a user of GO Network or the Infoseek Service browses
through directory and center topic pages. Directory and center rotations
allow advertisers to target an audience with a specific area of interest.
Like run of site rotations, directory and center rotations are sold in
blocks of impressions over a four week period. Because of the greater
selectivity of the audience, Infoseek's current CPM for directory and
center rotations ranges from $30 to $60.
Keyword: Keyword rotations are advertisements that are displayed when an
Infoseek Search contains a particular keyword selected by the advertiser.
This option offers the advertiser a highly targeted, self- selected
audience. Through its proprietary advertising management system, Infoseek
tracks every word that is queried by Infoseek Search users. Through this
tracking, Infoseek has identified keywords that are most frequently queried
by Infoseek viewers and requested by advertisers. Infoseek's current four
week rate card CPM for a keyword is $55 to $60.
Center and Cross-Service Sponsors and Partners
The introduction of the "channels" on the Infoseek Service in October 1997,
and the expansion of the channels to the current 18 centers on GO Network and
the Infoseek Service, in addition to providing a better
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viewer experience, allows Infoseek to better segment target audiences for
advertisers and sponsors. In addition, Infoseek has been able to supplement
its banner advertising business with media-based revenues from sponsorship of
its channels, centers and sub-centers.
Sponsors and content providers featured on centers include the following:
<TABLE>
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CENTERS SPONSORS AND CONTENT PROVIDERS
<C> <S>
Automotive CarSmart, Insweb
Careers CareerPath
Communications AT&T
Computers CMP Media, Inc.
Entertainment N2K, DVD Express
Health Women.com, Onhealth, Vitamin Shoppe
Internet CMP Media, Inc.
Money S&P Comstock, Zachs Investment Research
Travel Microsoft Expedia
Real Estate NetSelect, Apartments.com, HomeShark
Women's iVillage
CROSS-SERVICE
Borders Online
Microsoft Sidewalk
</TABLE>
Ultramatch Targeting
Infoseek currently sells Ultramatch, an advertising management report
derived from technology which creates a viewer profile based on real, observed
viewer behavior, including user registration information. With this
information, Infoseek can offer precise, targeted advertising based on
searching behavior. Infoseek and its advertisers have found that this
technology significantly increases the frequency with which viewers of an
advertisement choose to link to the advertisers' site. This targeted
advertising approach allows Infoseek to differentiate its advertising services
from other Internet media. Infoseek's current CPM for this targeting is $75,
and the net cost for an Ultramatch behavioral report is $1,100.
Advertisers
During the nine months ended October 3, 1998, over 500 advertisers placed
advertisements on the Infoseek Service. No one advertiser accounted for more
than 10% of Infoseek's revenues for the nine months ended October 3, 1998.
Many of Infoseek's contracts with advertisers have terms of three months or
less.
Sales Force
As of October 3, 1998, Infoseek's advertising sales staff consisted of 54
professionals located in Atlanta, Chicago, Los Angeles, New York, San
Francisco and Sunnyvale. Infoseek believes that having an internal direct
sales force allows it to better understand and meet advertisers' needs,
increase its access to potential advertisers and maintain strong relationships
with its existing base of advertising clients.
International Operations
Infoseek offers its search and directory services internationally through
partnerships with local providers of directory and editorial content in
France, Italy, Japan, Mexico, Sweden and the United Kingdom. Infoseek's search
and directory services are also available in Spanish, Portuguese, Danish, and
Dutch. In November 1998, Infoseek announced a joint venture agreement with
Deutsche Telecom, Axel Springer Verlag, and Verlagsgruppe Georg von
Holtzbrinck to launch Infoseek Germany. Infoseek Germany is expected to launch
in the spring of 1999 and will provide localized search, navigation, and
content services in Germany. In addition, Infoseek's U.S. sales force sells
advertisements on Infoseek's foreign sites to U.S. advertisers who want to
reach a global audience. During 1996 and 1997 and the nine months ending
October 3, 1998, less than 10% of Infoseek's traffic
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was derived from international sources and less than 10% of Infoseek's
revenues were derived from advertising to international users. See "Risk
Factors--If Infoseek Is Not Successful in Expanding Internationally, Its
Business May Suffer."
Finally, Infoseek, through Starwave, provides limited hosting services and
licenses some of its proprietary software to Disney.
Technology
Core Search Engine Technology
Infoseek Search is based on Ultraseek, an enhanced technology that provides
users enhanced levels of accuracy, currency, comprehensiveness and speed.
Infoseek Search includes built-in intelligence with features such as phrase,
capitalization and proper name recognition. Infoseek's highly-rated search
engine seeks to deliver accurate results, which are characterized by the level
of precision and the level of recall. In addition, due to the dynamic nature
of the Internet, the retrieval of up-to-date information has become another
key factor for the evaluation of Internet search services. To bring current
information to the viewer, Infoseek has developed technology to regularly
update its entire database of Web pages. This enables the Infoseek services to
deliver accurate, relevant and up-to-date search results. To facilitate the
ease of use of the service, Infoseek Search includes a sophisticated
technology to interpret "natural language" queries. Infoseek also uses a
proprietary Web spider which works to enhance the performance of the search
engine. A Web spider is software that identifies and catalogs pages on the
Web. This catalog, when indexed with text retrieval software such as
Infoseek's search engine, can be quickly accessed by keyword or phrase.
Together, the search engine technology and the Web spider technology are used
to index Web pages, the directory and other sources of content. Infoseek is
continually developing its core search engine technology, including the Extra
Search Precision technology and advanced search features described above.
Advertising Management
Infoseek has developed certain proprietary systems for the placement of
advertisements with targeted audiences on the Infoseek services. Infoseek's
advertising management systems are capable of presenting, in real- time,
advertising that corresponds to a user's inquiry. If certain keywords have
been purchased by more than one advertiser, the system automatically
determines which advertisement is displayed based upon the number of
impressions under contract and delivered to date. As part of Infoseek's
proprietary advertising management system, Infoseek also maintains a database
that tracks the number of searches of each word queried by Infoseek's users,
the number of browses through each directory category and the number of
impressions of each advertisement. This system assists Infoseek in estimating
the number of expected impressions of specific advertisement options marketed
by Infoseek or otherwise sought by advertisers. Starwave has also developed a
similar proprietary system.
In order to address increasing advertising volume, Infoseek plans to
customize and enhance Starwave's advertising management systems which are
currently used for managing advertising for the Joint Venture websites. These
enhanced systems will be used in both the Infoseek Service and GO Network
operations. To the extent that Infoseek encounters material difficulties in
utilizing these systems, Infoseek will need to devote additional resources to
enhance its current systems. Any extended failure of, or material difficulties
encountered in connection with, Infoseek's advertising management systems may
expose Infoseek to "make good" obligations with its advertising customers.
These "make good" obligations, by displacing advertising revenue (among other
consequences), would reduce revenue and would have a material adverse effect
on Infoseek's business, results of operations, financial condition and
prospects.
Website Production Technology
Infoseek, through Starwave, has internally developed technologies that
facilitate authoring capabilities for text, audio, graphics and video that
enhance the speed and interactivity of its services, as well as technology
designed to enable consumers to make secure purchases using credit cards over
the Internet.
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Marketing and Distribution
Marketing
Infoseek builds brand awareness for its services through an integrated plan
utilizing online and traditional media, public relations and promotions.
Infoseek also cross-promotes with content providers through advertising swaps
both in online media and traditional print and broadcast media. The Joint
Ventures also build brand awareness through their relationships with partners
with strong brands, including the NFL, the NBA, NASCAR, and Outside magazine.
Promotion
Under an agreement with Disney affiliate ABC, ABC has agreed to provide, and
Infoseek has agreed to purchase, $165 million in promotional support and
activities relating to GO Network over five years. As part of such promotion,
Disney agreed to co-brand all ABCNews.com and ESPN.com owned non-traditional
media promotion with promotions for GO Network. ABC and ESPN broadcasts
promote ABCNEWS.com, ABC.com, ESPN.com and GO Network.
Distribution
Infoseek seeks to form relationships that maximize audience reach and create
alternate distribution centers to Infoseek's services. Infoseek has
relationships with Netscape and Microsoft, each of which distributes browser
software, which contain a built-in "Internet search" feature, to its customers
which is used to navigate the Web. Infoseek depends on these agreements for a
portion of its traffic, and traffic affects advertising revenue. Infoseek also
has distribution relationships with various Internet service providers and
content providers such as AT&T, WebTV, Netscape and Microsoft. Infoseek Search
and centers are listed by each of these companies as a navigational service
available to their users. The terms of these relationships vary widely, both
in the prominence given to the Infoseek Service and/or GO Network relative to
other alternatives and the compensation paid by Infoseek for advertising.
Research and Development
The Company believes that its future success will depend on its ability to
enhance its existing products and to develop and introduce new products
related to Infoseek's Internet services and Ultraseek Server software
products. As of October 3, 1998, Infoseek had 84 full time employees engaged
in research and development for existing and potential new services and
products. The Company's research and development expenses for the nine months
ended October 3, 1998 and September 30, 1997 and for the years ended December
31, 1997 and 1996 were $7,432,000, $5,879,000, $7,900,000 and $4,550,000,
respectively. The Company plans to continue to increase its research and
development budget and staffing levels in fiscal 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Competition
The market for Internet and intranet products and services is very
competitive. Infoseek expects the market to become more competitive. Because
the market for search and portal services is new and developing, Infoseek
cannot predict how competition will affect Infoseek, its competitors or its
customers. Infoseek believes that the Internet market increasingly will
require portal services to deliver a large variety of multimedia content and
services. Infoseek may not be able to compete successfully. If Infoseek fails
to respond to competitive pressures, including those listed below, Infoseek's
business, results of operations, financial condition and prospects will be
seriously harmed.
Infoseek believes that its future success partly depends on its ability to
deliver a broad variety of multimedia content and services. To attract
advertisers, Infoseek believes it must offer:
. A large number of users,
. Users with attractive demographic profiles, and
. Cost-effectiveness.
Infoseek believes that the number of companies selling advertising on the
Web and the amount of advertising space on the Internet have greatly
increased. Infoseek may therefore face a market which demands lower prices for
the purchase of advertisements and this could result in a decline in
Infoseek's revenues.
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Infoseek believes it faces competition in numerous areas, including:
<TABLE>
<S> <C>
Business Area Key Features Key Competitors Key Competitive
Forces
Consolidated Combined services including:
Internet Products . Search and directory
(GO Network, . Email listings
Infoseek Service) . News information
. Internet commerce
. Chat and bulletin boards
Yahoo, America Control content
Online, Netscape, Provide
Excite, additional
Microsoft, Lycos, features
CNet Reduce viewer
access to
competing
services
Search and Ability to search DEC/AltaVista, Enhance search
Navigation the web and find Excite, Inktomi, features
Services information Lycos Use technology to
(Infoseek Search) "push" a
particular
service to users
Develop
"intelligent"
searching
Search Software Software to allow DEC/AltaVista, Enhance search
(Ultraseek Intranet and Lycos, OpenText, features
Server) Internet websites Verity Increase
to have search compatibility and
features ease of use
Develop
"intelligent"
searching
Internet Media Creative and Deliver timely
(ABCNEWS.com, original content, and informative
ESPN.com, Mr. including: information and
Showbiz, CNN, The New York multimedia
Celebsite, other . Current events Times, Washington content
Joint Venture Post, CBS News, Provide easy
Services) NBC access to
information
. Sports Fox Sports,
CNNsi, CBS
Sportsline,
Yahoo! Sports
. Business and Microsoft
stocks Investor, Quicken
Financial
Network, Reuters,
Dow Jones, Yahoo
Finance
. Entertainment E! Online
Entertainment
Weekly/Pathfinder
Internet and Traditional media Provide
other advertisingsources, such as: interesting and
Media popular
(GO Network, ABC, NBC, CBS, interactive or
ABCNEWS.com, Fox traditional
ESPN.com) programming
Attract
advertisers
through users
. Broadcast
Television
. Cable Television ESPN, CNN
. Print Media The New York
(newspapers and Times, Washington
magazines) Post, USA Today,
Sports
Illustrated,
ESPN The Magazine
Electronic Retail items for Yahoo, Establish
Commerce sale over the AOL/Netcenter, infrastructure to
(GO Network Internet MSN, Lycos, process orders
Shopping center) Amazon.com, eBay quickly
(under Develop brand
development) name in commerce
Develop
partnerships with
merchants
</TABLE>
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In order for Infoseek to compete successfully, Infoseek must overcome many
risks, including:
. Low Barriers to Entry to the Internet. Infoseek believes that it is
relatively inexpensive to develop new internet technologies, products and
services. It is likely that other companies may offer similar products
and services that compete with Infoseek for advertisers.
. Quickly Changing Market. Because the Internet market is new and changing
quickly, Infoseek cannot predict which companies are likely to offer
competitive services in the future.
. Reliance on Advertising Revenues. Infoseek depends on advertising sales
for revenue. Because the Internet is still a new advertising medium,
there is a risk that the number of advertisers purchasing advertisements
on the Internet could decrease. Such a decrease could result in lower
advertising revenues for Infoseek.
. Brand Awareness. To compete effectively, Infoseek must successfully build
brand awareness for GO Network. Infoseek will devote significant
resources to the promotion of GO Network. If Infoseek fails to promote GO
Network successfully or Infoseek's competitors build strong brand
affiliation, GO Network will receive less user traffic and in turn
advertising revenues may decline.
. Industry Consolidation. Some of Infoseek's competitors have engaged in
business combinations or other strategic relationships with one another.
These combinations often increase a competitor's power or make it more
difficult for users to find and use Infoseek's products and services.
In addition, the development and growth of high speed direct connections
(such as the service provided by @Home, which recently agreed to acquire
Excite) may allow Infoseek's competitors to control content being delivered to
users. This may result in increased competitive pressure on Infoseek to
attract and retain users.
If Infoseek does not compete effectively, it will suffer immediate harm to
its services, results of operations and prospects.
Intellectual Property and Proprietary Rights
Infoseek's success depends heavily upon its exclusive technology, brand
names and Internet locations, known as "domain names." To protect its rights
to its software, systems, documentation and product features, Infoseek
currently relies on a combination of:
. Patent, copyright and trademark and service mark laws,
. Trade secret laws,
. Confidentiality procedures, and
. Contractual provisions.
These methods of protection may not be adequate to protect against others
using Infoseek's technology, brand names and content. Accordingly, Infoseek
may not be able to maintain the goodwill associated with its products and
services or competitive features.
Infoseek and its subsidiaries hold five U.S. patents and have 14 U.S. patent
applications pending. Infoseek and its subsidiaries have six foreign patent
applications pending corresponding to one U.S. application and one foreign
Patent Cooperation Treaty application (PCT) corresponding to three U.S.
applications. Infoseek and its subsidiaries have registered and applied for
registration for certain service marks and trademarks and will continue to
apply for registration of additional service marks and trademarks, as
appropriate. Disney has filed applications for trademarks relating to GO
Network. Infoseek generally enters into confidentiality agreements with its
employees and with its consultants and customers.
Despite these measures, Infoseek may not be able to protect its intellectual
property due to risks related to the application of intellectual property
laws. The application of copyright and trademark laws to the Internet and
other digital media is very uncertain. There has been a substantial amount of
litigation in the technology industry
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regarding intellectual property rights. See "Risk Factors--If Infoseek Is
Unable to Protect Its Intellectual Property, Its Business Could Suffer."
Further, Infoseek may not be able to use its intellectual property or
further develop its business because third parties may accuse Infoseek of
infringing their intellectual property. See "Risk Factors--Third Parties May
Prevent Infoseek from Developing Its Intellectual Property."
Infoseek is aware of a number of issued patents which cover interactive
programming, Internet programming and techniques, and electronic commerce. For
example, Infoseek is aware of a U.S. patent issued to Carnegie Mellon and
licensed to Lycos related to Web spider technology. While Infoseek currently
believes, based on a preliminary review of such issued patent and consultation
with its patent counsel, that its products and services do not infringe the
Carnegie Mellon patent, Infoseek cannot assure you it would prevail if Lycos
or Carnegie Mellon claimed Infoseek infringed such patent. Infoseek expects
patent infringement regarding Internet technologies to increase as the number
of products and competitors in this market grows and as new patents are
issued. Infoseek expects that patents, particularly in the areas of real-time
or "streaming" audio and video, online commerce and "digital cash," and other
technologies may issue in the future. Some of these technologies may be
considered to be critical to long-term success in the Internet marketplace.
Infoseek has also from time to time received notices from copyright and
trademark holders regarding use of music, images and websites in its services.
Disney, who licenses the GO Network name to Infoseek, has received notices
from certain parties regarding use of the GO Network name. Infoseek is also
aware of other companies and/or services that employ "Go" as a part of their
names. Infoseek cannot assure you that Infoseek's use of GO Network will be
free from challenge or liability and Infoseek cannot assure you it will always
be able to operate GO Network under such name.
Infoseek cannot assure you that it can adequately protect its intellectual
property. If Infoseek fails to protect its intellectual property, it could
suffer serious harm to its business, results of operations or prospects.
Infoseek also cannot assure you that third parties will not in the future
claim infringement by Infoseek with respect to Infoseek's current or future
products. Any such claims or counterclaims could:
. Be time-consuming
. Result in costly litigation
. Cause product release delays
. Require Infoseek to redesign its products
. Require Infoseek to enter into royalty or licensing agreements
These claims of infringement, whether successful or not, could seriously
harm Infoseek's business, results of operations or prospects.
Employees
As of October 3, 1998, Infoseek had 319 full-time employees, including 84 in
research and development, 141 in sales and marketing, 22 in operations and 72
in finance and administration. Also as of October 3, 1998, Starwave had a
total of 337 employees (including those employees supporting the Joint
Ventures), of which 40 were involved in Starwave's technology division, 39
were in Web operations and management information systems, 24 were in general
administration and development and 234 were involved in the Joint Ventures.
None of these employees is represented by a labor union. None of Infoseek,
Starwave and the Joint Ventures has experienced any work stoppages and each
considers its relations with its employees to be good. Infoseek's performance
is substantially dependent on the continued services of the management teams
of Infoseek, Starwave and the Joint Ventures and on their continuing ability
to attract and retain highly qualified and motivated officers and key
employees and to attract and retain sufficient numbers of technical and
production personnel.
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RELATIONSHIP WITH DISNEY
The following is a summary of certain business transactions and
relationships between Infoseek and Disney.
On June 18, 1998, Infoseek California, Infoseek Delaware, Starwave and
Disney entered into the Starwave merger agreement. Pursuant to the Starwave
merger agreement, Infoseek acquired Starwave, which had been approximately 91%
owned by Disney, and established a new holding company structure which
involved a reincorporation into Delaware. As a result, each of Starwave and
Infoseek California became wholly-owned subsidiaries of Infoseek Delaware.
This transaction closed on November 18, 1998. Accordingly, the business of
Infoseek consists primarily of holding the capital stock of Infoseek
California and Starwave. Each of Infoseek California and Starwave continues to
operate their current businesses. In addition, Infoseek and Disney have
established a strategic relationship concerning the development, launch and
promotion of GO Network. See "Risk Factors--GO Network May Not Succeed Without
Disney's Cooperation."
In light of Disney's ownership interest in Starwave, Disney received
approximately 23,500,000 shares of Infoseek common stock as a result of
Infoseek's acquisition of Starwave. In addition, Disney purchased an
additional 2,642,000 unregistered shares of Infoseek common stock and a
warrant, subject to vesting, to purchase an additional 15,720,000 unregistered
shares of Infoseek common stock at certain times, at certain prices and
subject to certain conditions, in exchange for approximately $70.0 million in
cash and a $139.0 million five-year promissory note.
As a result of the transactions described above, Disney and its affiliates
hold approximately 43% of Infoseek's outstanding common stock. In addition,
Disney and its affiliates have the right to acquire, through the warrant,
which becomes exercisable over three years from November 18, 1998, an
additional 15,720,000 shares of Infoseek common stock. If Disney exercises the
warrant, Disney and its affiliates will hold on an aggregate basis together
with the shares owned by Disney, approximately 50.1% of the outstanding
Infoseek common stock on a fully-diluted basis assuming exercise of all
outstanding options, warrants and other rights to acquire Infoseek common
stock. Disney also has certain contractual rights to maintain its initial
percentage stock and warrant ownership through direct purchases from Infoseek
in the event of dilutive issuances. Disney exercised a right to purchase
299,182 shares of Infoseek common stock and a warrant to purchase 59,489
shares of Infoseek common stock in order to maintain its current ownership
interest in Infoseek. See "Risk Factors--Disney Owns A Substantial Amount of
Infoseek Stock and Is Able to Significantly Influence Infoseek's Affairs."
Further, upon closing of the transactions described above, the Infoseek Board
of Directors was expanded from five to eight members, with three Disney
designees, Steven Bornstein, Robert Iger and Jake Winebaum, appointed to the
Board. See "Directors and Executive Officers of the Registrant."
Infoseek and Disney also entered into a governance agreement with respect to
a number of matters. Under the governance agreement, for a period of three
years following consummation of the date of the agreement, subject to earlier
termination under certain circumstances, Disney agreed, among other things, to
standstill provisions to not acquire over 49.9% of Infoseek's outstanding
voting stock, to not solicit proxies or act with another party for purposes of
voting or acquiring shares of Infoseek voting stock, and to not transfer its
Infoseek shares except under certain circumstances. The governance agreement
also provides, among other things, for supermajority Board approval with
respect to certain matters and, together with Infoseek's certificate of
incorporation, during the standstill period, restricts Disney's ability to
proceed with a tender offer for or merger with Infoseek in certain cases
without the approval of members of the Infoseek Board not designated by
Disney. During and following the standstill period any Disney tender offer for
Infoseek is required to be conditioned upon a majority of disinterested
Infoseek shareholders tendering their shares.
Infoseek and Disney also entered into a number of licensing and commercial
agreements contemplating the development, launch and promotion of GO Network.
GO Network is based, in part, upon certain intellectual property owned by
Disney and licensed to Infoseek pursuant to the terms of a royalty-bearing
license agreement. This license agreement may terminate if certain events
occur, such as if another party acquires 25% or more of Infoseek's stock,
Infoseek fails to spend a certain amount of money to promote GO Network, or
Infoseek files
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for bankruptcy. While owned and operated by Infoseek, GO Network also is
subject to an advisory committee which consists of one Infoseek representative
(currently Harry Motro) and one Disney representative (currently Jake Winebaum)
for oversight of activities relating to the service. In connection with GO
Network, Disney's wholly-owned subsidiary, ABC, Inc., agreed to provide, and
Infoseek agreed to purchase, approximately $165.0 million in promotional
support and activities over five years. As part of such promotion, Disney
agreed to co-brand all ABCNEWS.com and ESPN.com owned non-traditional media
promotion with promotions for GO Network. Disney has also agreed to integrate
Infoseek's search and directory technology into its own Internet-based
services. See "Risk Factors--Disney Owns A Substantial Amount of Infoseek Stock
and Is Able to Significantly Influence Infoseek's Affairs."
Disney also agreed to amend certain aspects of the Joint Ventures. Starwave
also agreed to act pursuant to representation agreements as the representative
of the ABCNews Joint Venture and ESPN Joint Venture for the sale of advertising
services. See "Risk Factors--Infoseek's Future Success Depends on The
Continuation and Integration of Joint Venture Relationships and on Entering
Into New Third Party Relationships" and "--If Infoseek Does Not Achieve Revenue
Minimums Under Representation Agreements, It May Incur Losses Under These
Agreements."
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RISK FACTORS
You should carefully consider the risks described below before making your
decision to invest in Infoseek. The risks and uncertainties described below
are not the only ones facing Infoseek. Additional risks and uncertainties not
presently known to us or that we do not currently believe are important to an
investor may also harm Infoseek's business operations.
If any of the events, contingencies, circumstances or conditions described
in the following risks actually occur, Infoseek's business, financial
condition or results of operations could be seriously harmed. If that occurs,
the trading price of Infoseek common stock could decline, and you may lose
part or all of your investment.
If GO Network is Not Successful, Infoseek's Business Would Be Seriously Harmed
Infoseek believes that its new Internet service, GO Network, is critical to
its business. If Infoseek does not further enhance GO Network, develop more
functions and services for GO Network, integrate more content into GO Network
or successfully promote GO Network, Infoseek's business, financial condition
and operating results would be seriously harmed.
In addition, particularly given the growing number of new Internet sites and
low barriers to entering the Internet market, Infoseek also cannot assure you
that users and advertisers will accept GO Network. If users and advertisers do
not accept GO Network or do not find it to be of high quality, Infoseek will
experience decreased revenues and may be required to incur additional expenses
to promote GO Network.
Further, Infoseek is transitioning users from the Infoseek Service to GO
Network. Infoseek cannot assure you this transition will occur effectively and
without disruption to its users, advertisers and partners. Current Infoseek
advertisers and content providers may not continue to advertise or provide
content to either the Infoseek Service or GO Network. The promotion of GO
Network may result in potential confusion or a decline in loyalty among users
or customers of the Infoseek Service or the ABCNEWS.com or ESPN.com services,
which are now part of GO Network.
Finally, in order to attract users and build strong brand recognition and
loyalty for GO Network, Infoseek will be required to significantly increase
spending to promote GO Network, including the purchase of promotion from
Disney affiliate ABC. Infoseek may also be required to spend additional money
to purchase and produce new content. Such additional spending will result in
continued operating losses and delays to Infoseek's achievement of
profitability.
As a result of these risks, Infoseek cannot assure you that GO Network will
be successful or result in greater revenues, cash flows or any profits to
Infoseek. See "Business--GO Network and the Infoseek Service."
GO Network May Not Succeed Without Disney's Cooperation
Infoseek and Disney plan to jointly promote GO Network. If Disney does not
effectively promote GO Network, GO Network may not be a success and Infoseek's
business may suffer.
Infoseek licenses the GO Network trademark from Disney. This license may be
terminated by Disney under certain circumstances. If Disney terminates the
license, GO Network would be severely harmed. Further, if Disney does not
protect the GO Network trademark against infringement or if this trademark
infringes the rights of others, the value of the trademark would be diminished
and GO Network would be harmed. See "--Third Parties May Prevent Infoseek From
Developing Its Intellectual Property," and "Business--Relationship with
Disney."
Although Disney has generally agreed to not compete with Infoseek in certain
limited geographic and product areas, Disney may enter into transactions with
any of Infoseek's competitors or provide Disney content to Infoseek's
competitors. Disney currently provides some of its content to competitors of
Infoseek and maintains
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a number of websites which are not expected to be linked to GO Network.
Infoseek cannot assure you that Disney will not compete with GO Network or the
Infoseek Service.
If Infoseek Encounters Difficulties in Integrating Starwave and Quando,
Infoseek Will Not Experience All of the Expected Benefits of these
Acquisitions
To achieve benefits from Infoseek's recent acquisitions of Starwave and
Quando, Infoseek must quickly and smoothly integrate its operations with the
respective operations of Starwave, Starwave's joint ventures with ESPN and
ABC, and Quando. Infoseek will be required to coordinate Infoseek's,
Starwave's and Quando's respective product and service offerings. Infoseek
will also be required to combine Infoseek's, Starwave's and Quando's sales,
marketing and research and development efforts. Infoseek cannot assure you
that the integration will occur quickly and successfully or that it will be
able to take full advantage of the combined company's sales force, marketing
and research and development efforts. If Infoseek does not successfully
integrate its operations, Infoseek's business, results of operations,
financial condition and prospects could be seriously harmed.
Since Infoseek's principal office (Sunnyvale, California), Starwave's
headquarters (Bellevue, Washington), the ABC News Joint Venture (principally
located in New York City), the ESPN Joint Venture (principally located in
Bristol, Connecticut and New York City), and Quando's headquarters (Portland,
Oregon), are geographically dispersed, integrating these organizations and
operating these businesses will be more difficult. In addition, Infoseek has
approximately 410 more employees now than prior to these acquisitions.
Infoseek management will be required to spend a significant amount of time on
integration issues, which may distract their attention from the day-to-day
operations of Infoseek.
Accounting Charges From Acquisitions Will Delay and Reduce Profitability
Infoseek's acquisitions of Starwave and Quando were accounted for under the
purchase method of accounting. As a result, Infoseek will have reduced
profitability for at least several years due to accounting charges relating
to:
. amortization of intangible assets:
1. developed technology and assembled workforce of Starwave: $45.2
million amortized over a two year period
2. developed technology and assembled workforce of Quando: $8.7 million
amortized over a two year period
3. goodwill of Starwave: $658.5 million amortized over a ten year
period
4. goodwill of Quando: $9.1 million amortized over a two year period
5. joint venture relationships: $178.5 million amortized over a ten
year period
. in-process research and development of Starwave and Quando: $72.6
million expensed in the quarter ended January 2, 1999 and $4.3 million
to be expensed in the quarter ended April 3, 1999
. remaining integration costs: up to $4.2 million
. significant future charges relating to sales of shares and warrants
which Infoseek may be required to make to Disney; below fair market
value at the time of purchase in connection with Disney's exercise of
its rights to maintain its ownership interest in Infoseek
. increased operating expenses due to Infoseek's expanded business,
including GO Network
. other costs not currently known
If these expenses are not timely followed by increased revenues, Infoseek's
business, results of operations, financial condition and prospects would be
seriously harmed.
In Order to Continue to Grow, Infoseek Will Need More Financing
Infoseek currently anticipates that its cash and other available sources of
funds will last through at least September 30, 1999. After that time, Infoseek
may need to raise additional funds. Additional financing may not
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be available on satisfactory terms, if at all. Infoseek's estimate of the time
period through which its cash and other sources of funds will be sufficient to
fund its operations is a forward-looking statement subject to risks and
uncertainties. The actual time period may vary as a result of a number of
factors including those set forth below in this risk factor.
Infoseek expects to use its funds to, among other things, continue
expanding, develop new and enhance existing services and products, promote GO
Network and acquire other businesses, products or technologies. Infoseek may
decide to spend more money than currently forecasted on any of these
activities, and therefore may be required to raise additional funds sooner
than currently anticipated. If Infoseek does not raise enough additional
funds, Infoseek may not be able to continue to do any or all of these
activities and Infoseek's business, financial condition and prospects could be
seriously harmed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Infoseek Liquidity and Capital
Resources."
If any additional funds are raised through the sale of stock or convertible
debt, the percentage ownership of Infoseek's current stockholders will be
reduced. Such stock or convertible debt also may have rights, preferences or
privileges greater than Infoseek's common stock.
Infoseek's Financial Results Will Vary
Infoseek and its subsidiaries have limited operating histories. The Internet
and intranet markets addressed by Infoseek are new. Infoseek therefore does
not have internal or industry-based historical financial data for any
significant period of time upon which to base projections for revenues or to
help budget operating expenses. As a result, Infoseek cannot assure you it
will have profits in any given period or in the long term.
Infoseek expects that its results will vary significantly in the future due
to a number of reasons, including:
. the rate of growth, usage and acceptance of the Internet, intranets and
online services,
. the rate of acceptance of the Internet as an advertising medium and the
demand for advertising,
. acceptance of the Internet for commerce,
. demand for Infoseek's products and services,
. the advertising budgeting cycles of individual advertisers,
. costs related to expansion and capital investments,
. results of acquisitions and strategic agreements, including amortization
of intangible assets,
. charges relating to the issuance of stock or warrants below market price
in connection with Disney's right to maintain its ownership interest,
. the introduction, marketing and acceptance of new, enhanced or
alternative products or services by Infoseek or by its competitors,
. Infoseek's ability to anticipate and effectively adapt to and expand in
a developing market,
. Infoseek's ability to adapt to rapidly changing technologies and develop
new technologies,
. technical difficulties or system outages,
. Infoseek's ability to integrate operations and manage expansion,
. Infoseek's ability to attract, retain and motivate qualified personnel,
. initiation, implementation, amendment, renewal or expiration of
significant contracts with partners,
. performance of its partners such as Disney, ABC and ESPN in developing
their own brands,
. short and long term pricing changes by Infoseek or its competitors,
. specific economic conditions in the Internet, intranet and digital media
markets,
. strikes or other work disruptions,
. seasonal fluctuations in Internet use and the markets for news and
sports events,
. general economic conditions, and
. other factors.
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In addition, almost all of Infoseek's revenues come from advertising
contracts and related sponsorship agreements, many of which are for three
months or less. Advertising prices are closely related to the number of users
on Infoseek's services, and Infoseek cannot accurately predict the number of
users on its sites for any given time. As a result, Infoseek has difficulty
forecasting future sales and operating results.
Infoseek cannot assure you that it will be able to adjust spending quickly
to compensate for any reduction in future revenues. Accordingly, if revenues
do not meet Infoseek's expectations, there would be an immediate and serious
impact on Infoseek's business, results of operations, financial condition and
prospects.
Disney Owns A Substantial Amount of Infoseek Stock and Is Able to
Significantly Influence Infoseek's Affairs
Disney is the principal stockholder of Infoseek, owning approximately 43% of
Infoseek's outstanding stock. Disney also owns warrants which generally become
exercisable over three years from November 1998 that will allow Disney to own
a total of 50.1% or more of Infoseek's outstanding common stock. Infoseek and
its stockholders face several specific risks as a result of Disney's ownership
of Infoseek's common stock, including the following:
Disney Has Certain Control Over Infoseek's Governance.
Through its substantial ownership of and its agreements with Infoseek,
Disney may exercise significant control over Infoseek. Specifically:
. Disney may be able to exercise effective control over certain matters
requiring stockholder approval.
. Disney has the right to have its nominees for director submitted to a
vote of stockholders of Infoseek. Disney currently is entitled to a
number of nominees sufficient to require the approval of the Disney
nominees for those transactions requiring supermajority board approval,
described below.
. Supermajority board approval is required for certain Infoseek
transactions, including:
. amendment of Infoseek's certificate of incorporation or bylaws,
. a transaction in which the ownership control of Infoseek changes,
. sale of 15% or more of Infoseek's assets,
. issuance of securities representing 15% or more of Infoseek's
outstanding shares or for $200 million or more,
. certain debt or cash transactions by Infoseek of $200 million or
more, and
. any appointment of a new Chief Executive Officer of Infoseek.
Disney May Be Able to Obtain Majority Control of Infoseek in the Future.
Although Disney has agreed for a three-year period to not acquire voting
power over more than 49.9% of Infoseek's stock, this "standstill" obligation
may be terminated earlier in certain limited circumstances. If the standstill
obligation terminates, Disney could quickly obtain majority control over
Infoseek.
Disney Has a Right to Purchase Additional Shares in Future Infoseek Offerings
Which Could Further Dilute Other Shareholders' Ownership.
Disney has a right to purchase additional shares and warrants of Infoseek in
order to maintain its ownership level if Infoseek issues additional shares or
options. Disney's purchase of additional shares will dilute other Infoseek
stockholders' ownership and could reduce Infoseek's earnings per share, if
any. Disney's purchase of additional shares and warrants could also result in
material charges if the purchase of shares or warrants, or the price of the
warrants, to Disney are below fair market value at the time of purchase; these
charges may materially adversely affect Infoseek's results of operations.
Disney's Ownership Reduces Opportunity for an Acquisition of Infoseek by a
Third Party.
Disney's substantial ownership position in Infoseek, as well as the terms of
the GO Network trademark license agreement between Infoseek and Disney, may
prevent or discourage tender offers for Infoseek's common
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stock or other changes in the control of Infoseek unless the terms are
approved by Disney. Therefore, it is difficult for a person other than Disney
to acquire all or a large portion of Infoseek stock. See "Business--
Relationship with Disney."
If Infoseek Cannot Renew Existing or Enter Into New Agreements Which Result In
User Traffic, or If Sites That Provide Traffic to Infoseek Are Not Successful,
Infoseek's Advertising Revenue Will Decrease
Infoseek's success depends in great part on strategic relationships with
third parties as sources of traffic and as providers of content to its
Web site. Infoseek's traffic agreements generally have terms of one year or
less. A significant portion of the aggregate page views on the Infoseek
Service is generated by traffic derived from third party sources, principally
Microsoft, WebTV and Netscape. Infoseek's agreement with Netscape was
renegotiated on November 25, 1998, resulting in Infoseek receiving less
traffic from Netscape.
When existing traffic agreements terminate, Infoseek may not be able or
willing to renew them. Infoseek may not be able to enter into other agreements
on good terms or at all. If Infoseek does not renew these agreements or enter
into similar agreements on good terms or does not develop significant traffic
to make up for the loss of these agreements, Infoseek's advertising revenues
will be reduced. Reduced advertising revenues would likely seriously harm
Infoseek's business, results of operations, financial condition and prospects.
In addition, the products or services of those companies that provide access
or links to Infoseek's products or services, such as other website operators,
may not achieve market acceptance or commercial success, which would likely
seriously harm Infoseek's business, results of operations, financial condition
and prospects.
Infoseek's Future Success Depends on the Continuation and Integration of Joint
Venture Relationships and on Entering Into New Third Party Relationships
Infoseek's success also depends in great part on the continuation and
integration of its joint ventures and third party relationships, especially
the joint ventures with ESPN and ABC. Under certain representation agreements,
Starwave contracted for, and has exclusive rights to sell, all advertising and
other related items of the Joint Ventures. Starwave guarantees its performance
through minimum revenue commitments and is at risk if its subsequent
collection of the related receivables is insufficient to cover such
commitments. These representation agreements will result in Starwave
recognizing revenue for the sale of the advertising and of related items and a
corresponding representation fee for amounts due to the Joint Ventures. If
Infoseek is unable to continue its joint ventures with its joint venture
partners, integrate these joint ventures into its business or enter into new
joint ventures, Infoseek may not be able to keep or create interactive
services and products that are attractive to users and advertisers. This in
turn could seriously harm Infoseek's business, financial results and financial
condition.
Infoseek Has Had Losses in the Past and Has Difficulty Predicting Future
Results But Expects Fluctuations and Losses in the Future
Infoseek has not yet been profitable and expects to have consolidated net
losses for a number of years. The limited operating histories of Infoseek and
its subsidiaries make it difficult to budget or predict future results.
Although Infoseek has experienced significant revenue growth in 1997 and 1998,
Infoseek cannot assure you that revenues will continue to grow or that
Infoseek will achieve profitability.
Infoseek and its prospects must be considered in light of the risks, costs
and difficulties frequently encountered by companies in their early stage of
development, particularly companies in the new and rapidly evolving Internet
market. In addition, because the acquisitions of Starwave and Quando are large
and complex, Infoseek may be required to reorganize its operations in order to
operate more effectively. For example, in January 1999, Infoseek reorganized
all of its product and engineering related efforts into a single department in
an effort to become more functional and efficient. Due to the complexity and
scale of Infoseek's recent acquisitions and the rapid pace of change and
development of the Internet market, Infoseek's operating plans and forecasts,
including its projected business outlook, and Infoseek's operating objectives,
are subject to frequent revision. Although Infoseek has recently begun a new
multi-year planning cycle, future events and plans
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may cause Infoseek to dramatically revise its business objectives and
estimates of profitability. Infoseek cannot assure you it will be able to
adequately address the challenges of the Internet market and the complexity of
its recent acquisitions.
As of October 3, 1998, Infoseek had an accumulated deficit of $53.7 million
and as of October 4, 1998, Starwave had an accumulated deficit of $115.7. On a
pro forma basis as of October 3, 1998, including Infoseek, Starwave and
Quando, Infoseek would have had an accumulated deficit of approximately $130.7
million.
In addition, Infoseek may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could seriously harm
Infoseek's business, results of operations, financial condition and prospects
in the short-term or long-term. Infoseek's agreements with its strategic
partners have included and may in the future include substantial one-time or
up-front payments from these partners. Accordingly, Infoseek believes that its
quarterly revenues are likely to vary significantly in the future, that
period-to-period comparisons are not necessarily meaningful and that such
comparisons should not necessarily be relied upon as an indication of
Infoseek's future performance.
Infoseek's Stock Price Will Fluctuate
The market price of Infoseek's common stock has fluctuated and may continue
to fluctuate widely. Such changes are in response to a number of events and
factors such as:
. quarterly changes in results of operations,
. announcements of new technological innovations or new products and media
properties by Infoseek or its competitors,
. changes in financial estimates and recommendations by securities
analysts,
. the operating and stock price performance of other companies that
investors may deem comparable to Infoseek, and
. news relating to trends in Infoseek's markets or the economy generally.
In addition, the stock market and specifically the stock of Internet
companies have been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may reduce the price of Infoseek's common stock, without
regard to Infoseek's operating performance. In addition, Infoseek's operating
results may be below the expectations of public market analysts and investors.
In such event, the market price of Infoseek's common stock would likely
significantly decrease.
If Infoseek Does Not Develop Strong Brands, Its Business Could Suffer
Infoseek believes that establishing and maintaining the GO Network and
related brands is crucial to its business. Infoseek believes that brand
recognition will be even more important as the number of Internet sites grows,
due to the relative ease of entering the Internet market. If Infoseek does not
promote and maintain its brands, its business, results of operations,
financial condition and prospects would be seriously harmed.
In order to promote and enhance its brands, Infoseek believes it must create
loyalty among consumers. This will require Infoseek to spend a large amount of
resources on developing high quality products and services and to design and
use effective media promotions. If Infoseek does not develop high quality
products and services or have effective promotions, it will not develop a
strong brand.
Infoseek Faces Intense Competition and May Not Be Able to Compete Effectively
The market for Internet and intranet products is very competitive and
Infoseek expects these markets to become more competitive in the future.
Infoseek believes it faces competition in numerous areas, including:
. consolidated Internet ("Portal") products,
. search and navigation services,
. search software,
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. Internet media,
. advertising media, and
. electronic commerce.
If Infoseek is unable to compete effectively in these areas, it could suffer
serious harm to its business.
The market for these services is new and developing. As a result, Infoseek
cannot predict how competition will affect Infoseek, its competitors or its
customers. Since developing new Internet technology is relatively inexpensive,
it is easy for new competitors to enter the Internet and intranet markets, and
these markets are changing quickly. There is a large number of competitors
currently in these markets and new competitors are entering these markets
everyday. In addition, some of Infoseek's competitors have engaged in business
combinations or other strategic relationships in order to increase their power
and market share.
Many of Infoseek's competitors have greater resources, including financial,
marketing and technical resources, than Infoseek. These companies may be able
to offer greater content and services than Infoseek, including greater
multimedia content, search and directory services, on-line "communities" with
chat, e-mail and games, electronic commerce and high speed home Internet
access. Infoseek may be unable to develop these and other new services in
advance of competitors. See "Business--Competition."
If Infoseek Does Not Achieve Revenue Minimums Under Representation Agreements,
It May Incur Losses Under These Agreements
Under certain representation agreements with ESPN and ABC, Infoseek (through
Starwave) has agreed to act as the representative of the ESPN and ABCNews
Joint Ventures. As such representative, Infoseek will sell advertising and
related services for these Joint Ventures, and has agreed to make quarterly
payments to the Joint Ventures. These payments will be the greater of a
predetermined minimum amount or revenues actually billed to third parties
(even if not collected) in the performance of such advertising and related
services, less the costs of providing the services and a predetermined profit
margin.
Infoseek may not be able to sell the guaranteed minimum amount in any
quarterly period or be able to collect the money due from these sales and
services. Failure to sell the predetermined minimum amount or collect enough
money from these sales services could result in losses, and seriously harm
Infoseek's business, results of operations and financial condition.
If the Internet and Electronic Commerce Do Not Continue To Grow, Infoseek's
Business Will Suffer
To grow revenues, Infoseek depends on increased acceptance and use of the
Internet, intranets and other interactive online platforms as sources of
information, entertainment and sales of goods and services. If the Internet
grows more slowly than expected, or does not grow at all, Infoseek's business,
financial condition and operating results would be seriously harmed. If access
to the Internet or Infoseek's services is restricted, Infoseek's business,
financial condition and operating results would also be seriously harmed.
The Internet has grown very rapidly in recent years. Infoseek cannot assure
you that the Internet will continue to be accepted and widely used. In
particular, Infoseek cannot assure you that consumers will continue to use the
Internet for purchasing or selling goods and services or that advertisers will
continue to use it for advertising goods and services. Infoseek also cannot
assure you that a large base of users will support Infoseek's business.
Significant structural problems remain in using the Internet and conducting
electronic commerce, including:
. security
. reliability
. cost
. ease of use and access
. quality of service
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. lack of network infrastructure to support increased use
. speed of Internet service
. limitations on access by corporations and schools
. privacy
These problems may slow the growth of Internet use or the attractiveness of
the Internet for advertising and online transactions. In addition, the use of
the Internet could be reduced due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity or as the result of increased government regulation.
The Internet industry is young. The business model of Infoseek and its
competitors changes frequently and very few products and services have become
established in the market. The Internet market might not continue developing
or develop more slowly than expected. Infoseek may be unable to modify its
business model rapidly enough to remain competitive. The Internet market might
become filled with competitors. Infoseek's products may not become accepted by
Internet users or advertisers. If any of these events occurs, Infoseek's
business, results of operations, financial condition and prospects would be
seriously harmed.
If Internet Advertising and Related Sponsorship of Infoseek's Services Are Not
Accepted, Infoseek's Revenues Will Be Adversely Affected
Infoseek depends heavily on the sale of advertisements and related
sponsorships of GO Network and the Infoseek Service as a source of revenue.
Therefore, Infoseek depends on the acceptance and success of advertising on
the Internet. Infoseek cannot assure you that Internet advertising will be
widely accepted. The Internet market is changing quickly. Infoseek believes
that the number of companies selling advertising on the Web and the amount of
advertising space on the Internet have greatly increased recently. Infoseek
may therefore face a market which demands lower prices for the purchase of
advertisements and this could result in a decline in Infoseek's revenues. Many
of the advertisers on Infoseek's services are relatively new to Internet
advertising and have not devoted significant amounts of their advertising
budgets to Internet advertising. Advertisers may determine that traditional
sources of advertising, like television, radio and newspapers are less costly
or better at reaching customers than the Internet. There are no widely
accepted standards to measure the effectiveness of Internet advertising.
Infoseek believes that advertising sales are generally lower in the winter
and summer of each year as compared with the fall and spring. Infoseek also
believes that advertising usage changes with the economy. Seasonal and
economic changes could more seriously affect Internet advertising sales. Any
seasonal or economic-based changes in advertising sales could seriously harm
Infoseek's business, financial condition and operating results.
If Infoseek's Future Acquisitions and Strategic Transactions Are Not
Successful, Infoseek's Business May Suffer
Infoseek believes it may be necessary to acquire complementary products,
technologies or businesses to remain competitive. There are several risks of
acquisitions or other strategic transactions, including the Quando and
Starwave acquisitions, such as:
. difficulties integrating people and operations,
. difficulties integrating acquired technology or content into existing
businesses,
. potential disruption of Infoseek's ongoing businesses,
. expenses and other charges associated with transactions,
. the necessity of establishing and implementing uniform standards,
controls, procedures and policies for acquired companies,
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. impairment of relationships with employees, vendors and customers as a
result of any integration of new management personnel, technologies,
products and services,
. potential unknown liabilities associated with acquired businesses,
. use of limited cash resources,
. dilutive issuances of stock, and
. loss of key personnel.
There can be no assurance that Infoseek will be successful in overcoming
these risks. Infoseek may also encounter other problems in connection with
acquisition transactions.
Infoseek cannot assure you that any acquisition or strategic transaction
will be worth the time, effort and expense required to complete any
acquisition or transaction.
Infoseek May Not Be Able to Use Pooling Accounting for Future Acquisitions
Which May Reduce Its Future Profitability
Because of Infoseek's acquisition of Starwave and its transactions with
Disney, Infoseek may not be able to account for future acquisitions as
pooling-of-interests transactions for a period of time. Also, if Disney
chooses to obtain control when its warrant vests, Infoseek will not be able to
use pooling-of-interests accounting. Charges for the amortization of goodwill
incurred in acquisitions will reduce Infoseek's profits, if any, in the
periods over which it is amortized. Infoseek may also take charges for
acquired in-process research and technology when acquisitions occur. Such
charges for acquired in-process research and technology would reduce
Infoseek's profits in such period.
If Infoseek Does Not Improve its Products to Keep Pace with Changing
Technology, It Will Lose Users
Infoseek may not be able to respond to changing Internet technologies,
customers needs and industry standards. Infoseek may not be able to introduce
new products and services before competitors or improve existing products to
match competitors products and services. If it does not continue to timely and
continually improve its products and services and introduce new ones, Infoseek
could suffer serious harm to its business, results of operations and
prospects.
One key element of Infoseek's strategy is to continue to develop new
technological innovations in order to enhance the user's experience and
strengthen relationships with advertisers. The success of GO Network and its
component sites will depend in part on how easy-to-use, functional and
feature-filled such services are.
Because Infoseek needs to continue to provide technological improvements to
its services, including GO Network and the Infoseek Service, Infoseek faces
many risks. Infoseek cannot assure you:
. Any of its new or proposed products or services will be accepted by the
market or will continue to meet the market's changing needs.
. It will successfully design, develop, test, market and introduce new and
enhanced technologies and services.
. It will successfully improve its existing and planned products and
services.
. It will not experience difficulties that delay or prevent the successful
development, introduction or marketing of new or enhanced technologies,
products and services.
. It will bring its technological innovations to the market quickly and in
advance of its competitors.
. It will not have large expenses in order to develop, improve or acquire
new technologies.
. Its new or enhanced products and services will be free of errors and
will not require significant design changes once introduced.
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If any of these risks occur, customers may become dissatisfied with
Infoseek's products and services. In turn, Infoseek could lose users and could
experience delayed or lost advertising revenues.
Computer Intrusions or Electronic Commerce Liabilities Might Result in Losses
to Infoseek
Consumers' lack of faith in and lapses in the privacy and security of the
Internet and online transactions may also prevent the growth of the Internet
and electronic commerce generally. Infoseek's business, which depends on this
growth, may be harmed as a result.
Despite Infoseek's efforts to prevent intruders from breaking into
Infoseek's systems and stealing information or interrupting service, Infoseek
cannot assure you that it will be able to protect itself from computer
security intrusions. Infoseek and its contractors store and transmit
confidential information, such as computer software or credit card numbers. If
data is lost or stolen, Infoseek may be sued by the owners of the lost or
stolen data or by other entities who rely on the data.
Although Infoseek has agreements which are designed to limit Infoseek's
liability for losses, these agreements may not be enforceable. Even if they
are, the agreements may not be successful in limiting Infoseek's liability.
Also, Infoseek may not be able to negotiate these agreements with all parties.
Infoseek does not have insurance against these security risks, although it
does have standard business interruption and crime insurance which might cover
certain losses. If Infoseek's revenue from electronic commerce increases
substantially, Infoseek will consider buying additional insurance. However, if
Infoseek does not or cannot obtain adequate insurance at that time, large or
repeated security breaches into Infoseek's systems could seriously harm
Infoseek's business, results of operations and financial condition.
Infoseek has agreements and expects to enter into other agreements with
third parties where Infoseek is entitled to receive part of the revenues
received by these third parties from the purchase of goods and services by
users referred from Infoseek's products and services. Infoseek may also
directly sell goods and services on the Internet. These arrangements may
expose Infoseek to additional risks and uncertainties, including potential
liabilities to consumers of such products and services.
Infoseek May Experience Year 2000 Computer Problems That Harm Its Business
Certain computer systems may not correctly recognize dates when the year
changes from 1999 to 2000. Infoseek management has reviewed Infoseek's
exposure to this problem and does not believe that it will incur significant
expenses as a result of the effect of this problem on its products, services
or information technology. However, Infoseek does plan to replace several
systems as part of a conversion to improved financial and business systems in
connection with regular upgrade programs in late 1999 and will make minor
software alterations to certain of its systems to ensure full year 2000
readiness. Infoseek may not be able to implement these upgrades successfully,
and its belief that it will not incur significant expenses may be incorrect
due to unknown defects in its systems. If any of these were to occur, Infoseek
could suffer serious harm to its business, results of operations, financial
condition and prospects due to year 2000 computer system problems.
Infoseek is relying on assurances from vendors that they and their products
are prepared for the year 2000. Infoseek cannot assure you the assurances it
receives from vendors are reliable, since Infoseek has not independently
investigated its vendor's assertions about their products. In addition,
Infoseek has also not investigated year 2000 compliance by third parties who
are not vendors of Infoseek. Infoseek has no control over these third parties'
compliance. For example, if a link on GO Network or the Infoseek Search
service points to a website which is not year 2000 compliant, that link may
not be available to users and therefore the Infoseek services will offer fewer
features. If many linked sites do not work, the value of user traffic and
advertising on Infoseek's websites could materially decrease. In addition, if
Infoseek's review of its year 2000 readiness did not uncover all year 2000
problems, Infoseek does not have a contingency plan to address this risk and
could suffer serious harm or be required to expend resources to resolve those
problems. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
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In Order to Accommodate Future Growth, Infoseek Must Make Improvements to Its
Operations
Infoseek may not be able to manage its rapid growth effectively. In order to
take advantage of market opportunities, Infoseek may be required to expand.
Infoseek's growth has placed, and could continue to place, a significant
strain on Infoseek's limited personnel and other resources. Competition for
engineering, sales and marketing personnel is intense. Infoseek cannot assure
you that it will be successful in attracting and retaining such personnel.
In order to succeed, Infoseek must continue to:
. Invest in and improve operational, financial and management information
systems which affect planning, advertising sales, management, finance
and accounting.
. Enhance its advertising inventory management analysis system discussed
further under "--If Infoseek's Advertising Management Systems Fail,
Infoseek Could Lose Advertising Sales Opportunities."
. Hire, train, motivate and manage its employees.
. Maintain relationships with various partners, advertising customers,
advertising agencies, Internet sites and services, Internet service
providers and other third parties.
. Retain control by management over the operations and strategic direction
of Infoseek in a rapidly changing environment and locate new business
activities.
. Develop expanded electronic commerce capabilities, including an
infrastructure for security, order processing and financial reporting.
If Infoseek fails to do any of these or experiences problems, delays or
unanticipated additional costs in addressing these concerns, Infoseek's
business, results of operations, financial condition and prospects could be
seriously harmed.
Failures or Lack of Capacity in Infoseek's Computer Systems Could Result in
Loss of Users
If Infoseek's systems, the majority of which are located in Sunnyvale,
California, and Bellevue and Seattle, Washington, fail or function poorly for
any reason, these interruptions would result in less traffic to the Infoseek
services. If the interruptions continue, they could reduce the number of users
of and advertisers on Infoseek's products and services. A reduction in the
number of users of and advertisers on Infoseek's products and services could
seriously harm Infoseek's business, results of operations, financial condition
and prospects.
Infoseek relies on computer, network and telecommunications systems to
provide its products and services. Such systems:
. May fail to operate correctly
. May be strained by too many users or demands
. May be damaged by earthquakes, fires, floods, wind storms, power loss,
lightning, electrical and telecommunication failures or similar events
. May be damaged through physical or electronic break-ins or computer
viruses
Infoseek does not maintain a comprehensive disaster recovery plan and does
not have redundant systems for each of its services. Although Infoseek has
insurance for fires, floods, earthquakes (and, for the systems in Washington,
wind storms) and general business interruptions, the amount of coverage may
not be adequate to cover all losses which could occur. If losses occur from
failures of Infoseek systems and insurance does not fully cover such losses,
they could seriously harm Infoseek's business, results of operations,
financial condition and prospects.
Infoseek also depends on Web browser makers and Internet and online service
providers. Infoseek's users have experienced and may in the future experience
difficulties due to incompatibilities or other problems.
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Infoseek cannot control these Web browser makers and online services providers
and cannot predict when these incompatibilities or problems will occur.
Infoseek also depends on computer hardware suppliers to promptly deliver,
install and service its servers and other equipment and services used to
provide Infoseek's products and services. If Infoseek's access to the Internet
or computer systems fail, it could result in serious harm to Infoseek's
business, results of operations, financial condition and prospects.
If Infoseek's Advertising Management Systems Fail, Infoseek Could Lose
Advertising Sales Opportunities
In order to generate revenues, Infoseek must manage the advertising on its
large, high traffic websites. Infoseek relies on internal advertising
inventory management and analysis systems to provide internal reporting and
customer feedback on advertising. If Infoseek has serious difficulties in
utilizing these systems, Infoseek will need to devote more resources to
enhance these systems.
If Infoseek fails to properly display advertising because of problems with
its advertising management systems or other technical problems, Infoseek would
be required to deliver additional advertising displays which otherwise could
have been sold to other advertisers. Significant amounts of these "make good"
obligations could result in serious harm to Infoseek's business, results of
operations, financial condition and prospects.
If Infoseek Is Not Successful in Expanding Internationally, Its Business May
Suffer
As part of its business strategy, Infoseek has begun to expand its products
and services into international markets and is exploring further opportunities
to expand internationally. If Infoseek fails to be successful in international
markets, Infoseek's business could suffer.
Infoseek may not be successful in creating localized versions of its
products and services or marketing or distributing its products abroad. Even
if Infoseek is successful, its international revenues may not be adequate to
offset the expense of establishing and maintaining international operations.
Further, in addition to the uncertainty of Infoseek's ability to establish an
international presence, there are difficulties and risks inherent in doing
business internationally, such as:
. compliance with regulatory requirements and changes in these
requirements
. export restrictions
. export controls relating to technology
. tariffs and other trade barriers
. difficulty in protection of intellectual property rights
. difficulties in staffing and managing international operations
. longer payment cycles
. problems in collecting accounts receivable
. political instability
. fluctuations in currency exchange rates
. potentially adverse tax consequences
. increased competition
Any one or more of these factors could prevent Infoseek from being
successful in international markets.
Infoseek May Not Be Able to Attract or Retain The Key Personnel It Needs to
Succeed
If Infoseek is unable to attract and retain key and other skilled employees,
its business, results of operations, financial condition and prospects would
be seriously harmed. Infoseek's ability to generate revenues and profits
29
<PAGE>
depends upon its senior management team. Infoseek depends upon its Chairman of
the Board, Steven Kirsch, who is very involved in Infoseek's research and
development efforts, Harry Motro, its President and Chief Executive Officer,
Les Wright, its Senior Vice President, Chief Administrative Officer and Chief
Financial Officer, and Patrick Naughton, its Executive Vice President of
Products. Infoseek also depends on many other employees, such as employees
with writing, editing, sales, management, marketing or technical ability.
Employees with these skills are difficult to find, and competition for these
employees is intense. Most of Infoseek's key employees do not have employment
contracts. Infoseek may also require even more skilled employees because of
the launch of GO Network and acquisition of Starwave.
If Infoseek Is Unable to Protect Its Intellectual Property, Its Business Could
Suffer
Infoseek's success depends heavily upon its exclusive technology, brand
names and Internet locations ("domain names"). Infoseek cannot assure you that
it can adequately protect this intellectual property. If Infoseek fails to
protect its intellectual property, its business could suffer.
To protect its rights to its software, systems, documentation and product
features, Infoseek currently relies on a combination of:
. patent, copyright and trademark and service mark laws,
. trade secret laws,
. confidentiality procedures, and
. contractual provisions.
These methods of protection may not be adequate to protect against others
using Infoseek's technology, brand names and content. Accordingly, Infoseek
cannot assure you that it will be able to maintain the goodwill associated
with its products and services or competitive features.
Despite Infoseek's efforts to patent and trademark its intellectual property
and keep information confidential, Infoseek may not be able to protect its
intellectual property. Infoseek may not be able to protect its technology
because:
. Pending and new patent applications and trademark registrations may not
be approved.
. Even if issued, new patents and trademark registration may be
challenged, invalidated or designed around.
. Infoseek's new products or technologies may not be patentable.
. Time-consuming and costly litigation may be necessary to protect
Infoseek's proprietary technologies.
. Policing unauthorized use of Infoseek's intellectual property is
difficult and expensive.
. The laws of some foreign countries do not protect proprietary rights to
as great an extent as do the laws of the United States.
. Infoseek's competitors may independently develop similar technology or
design around Infoseek intellectual property.
. The application of copyright and trademark laws to the Internet and
other digital media is very uncertain.
See "Business--Intellectual Property."
Third Parties May Prevent Infoseek From Developing Its Intellectual Property
Infoseek may not be able to use its intellectual property or further develop
its business because of third parties. Infoseek cannot assure you that third
parties will not in the future claim infringement by Infoseek with
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<PAGE>
respect to Infoseek's current or future products. These claims of
infringement, whether successful or not, could seriously harm Infoseek's
business, results of operations or prospects.
Third parties:
. may bring claims of patent, copyright or trademark infringement against
Infoseek,
. may obtain patents or other intellectual property rights which may limit
Infoseek's ability to do business or require Infoseek to license or
cross-license technology, or
. may bring costly, time consuming lawsuits.
Infoseek is aware of a number of issued patents which cover interactive
programming, Internet programming and techniques, and electronic commerce. For
example, Infoseek is aware of a U.S. patent recently issued to Carnegie Mellon
and licensed to Lycos related to Web spider technology. While Infoseek
currently believes, based on a preliminary review of such issued patent and
consultation with its patent counsel, that its products and services do not
infringe the Carnegie Mellon patent, Infoseek cannot assure you it would
prevail if Lycos or Carnegie Mellon claimed Infoseek infringed such patent.
Infoseek expects patent infringement regarding Internet technologies to
increase as the number of products and competitors in this market grows and as
new patents are issued. Infoseek expects that patents, particularly in the
areas of real-time or "streaming" audio and video, online commerce and
"digital cash," and other technologies may issue in the future. Some of these
technologies may be considered to be critical to long-term success in the
Internet marketplace.
Infoseek has also from time to time received informal notices from copyright
and trademark holders regarding use of music, images and websites in its
services. Disney, who licenses the GO Network name to Infoseek has received
informal notices from certain parties regarding the use of the GO Network
name. Infoseek is also aware of other companies and/or services that employ
"Go" as a part of their names. Infoseek cannot assure you that Infoseek's use
of GO Network will be free from challenge or liability and Infoseek cannot
assure you it will always be able to operate GO Network under such name.
Disney does not indemnify Infoseek against claims of infringement by third
parties for use of GO Network. See "Business--Intellectual Property."
Changes In Laws Governing The Internet Could Decrease the Demand for
Infoseek's Services
If new laws or regulations are adopted or if courts apply or expand existing
laws in Internet cases, Internet use may decrease. This could in turn decrease
the demand for Infoseek's products and services or increase Infoseek's cost of
doing business. These effects or other effects of new laws and regulations
could seriously harm Infoseek's business, results of operations, financial
condition and prospects.
No government entity currently directly regulates Infoseek. Infoseek is,
however, subject to those general laws and regulations that apply to all
businesses. At present, there are few laws or regulations that apply to access
to or commerce on the Internet. However, proposals for regulation are
presented to federal, state, and foreign governments frequently. Laws or
regulations may be passed regarding the Internet on such issues as:
. user privacy (including sending of unsolicited e-mail, or "spamming"),
. consumer protection for products and services,
. media regulation, such as libel and obscenity,
. intellectual property, and
. liability of Internet service providers.
In addition, courts are still determining how existing laws regarding
property, copyrights, trade secrets, libel and defamation, and privacy apply
to the Internet.
Infoseek may also face claims because materials may be downloaded through
its online or Internet services and then distributed to others. Some of
Infoseek's products and services, such as chat rooms, messaging, and hosted
Web pages, contain content provided by users. Infoseek has little control over
these users' content. Claims might be made against Infoseek under a variety of
media and intellectual property laws for the nature, content,
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<PAGE>
publication and distribution of its materials or its users' materials. For
example, Infoseek might be subject to claims of copyright or trademark
infringement, obscenity, or libel brought against it for content that appears
on its site. These types of claims have been brought against online service
providers in the past, some of which have been successful.
Infoseek provides a variety of third-party information through its services.
For example, Infoseek's service provides news, stock quotes, analyst estimates
or other stock trading information. If this information contains errors,
Infoseek could be sued for losses suffered by users who relied on the
information. Infoseek expects to offer Web-based e-mail services in the near
future. E-mail may further expose Infoseek to potential risks. For example,
Infoseek may be subject to claims or liabilities from spamming, lost or
incorrectly delivered messages, use of e-mail for illegal purposes or fraud,
harassment or interruptions or delays in e-mail service.
Although Infoseek carries general liability insurance, such insurance may
not cover all claims or may not be sufficient to reimburse Infoseek for all
liabilities that may occur.
ITEM 2. PROPERTIES
Infoseek's principal administrative, sales, marketing, and research and
development facility is located in Sunnyvale, California. Infoseek currently
leases approximately 160,000 square feet (a section of which is currently
subleased to another tenant) in Sunnyvale pursuant to several lease agreements
which expire at various times through 2006. Infoseek also leases approximately
64,000 square feet in Bellevue, Washington for the headquarters and principal
operations of Starwave and 6,000 square feet in Seattle, Washington for
additional Starwave operations. Infoseek also leases approximately 12,000
square feet in San Francisco, California and approximately 7,500 square feet
in New York, New York. The Company also maintains several other offices
throughout the country, and the ABCNews Joint Venture and ESPN Joint Venture
maintain space in New York, New York and Bristol, Connecticut pursuant to
arrangements with ABC and ESPN. Infoseek is also in negotiations regarding
additional space in Seattle, Bellevue and New York.
Infoseek believes that its existing facilities are adequate for its current
needs and that additional space will be available as needed. There can be no
assurance, however, that additional space will be available on good terms or
at all. A system failure at Infoseek's or Starwave's facilities may have an
adverse impact on Infoseek. See "Risk Factors--Failure or Lack of Capacity in
Infoseek's Computer Systems Could Result in Loss of Users" and "--If
Infoseek's Advertising Management Systems Fail, Infoseek Could Lose
Advertising Sales Opportunities."
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against
Infoseek. From time to time, Infoseek may be a party to litigation and claims
incident to the ordinary course of its business. Although the results of
litigation and claims cannot be predicted with certainty, Infoseek believes
that the final outcome of such matters will not have a material adverse effect
on Infoseek's business, results of operations, financial condition or
prospects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
To date, Infoseek has not declared or paid dividends on its common stock.
The Board of Directors of Infoseek presently intends to retain all earnings
for use in Infoseek's business and therefore does not anticipate declaring or
paying any cash dividends in the foreseeable future. In addition, Infoseek's
equipment term loan facility restricts the payment of dividends when
borrowings are outstanding.
Infoseek's common stock has been traded on the Nasdaq National Market under
the symbol "SEEK" since June 11, 1996. The following table sets forth, for the
periods indicated, the high and low closing prices for Infoseek common stock
as reported by the Nasdaq National Market for the two most recent fiscal
years:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1997 Fiscal Year
First Quarter............................................... $ 11 $ 6 1/4
Second Quarter.............................................. 8 1/2 4 3/8
Third Quarter............................................... 9 11/16 4 11/16
Fourth Quarter.............................................. 14 1/2 7 1/8
1998 Fiscal Year
First Quarter............................................... $22 7/8 $8 7/16
Second Quarter.............................................. 45 18 1/16
Third Quarter (ending October 3, 1998)...................... 39 5/8 14 7/8
</TABLE>
On February 5, 1999, the last reported sale price for the common stock on
the Nasdaq National Market was $69 5/8 per share. As of February 5, 1999,
Infoseek estimates that there were approximately 758 holders of record of
Infoseek common stock and a substantially greater number of beneficial
holders.
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<PAGE>
ITEM 6. SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION
Explanatory Note
On January 28, 1999, Infoseek changed to a fiscal year with 52 or 53 week
periods ending on the Saturday nearest September 30. As a result, pursuant to
the rules of the Securities and Exchange Commission, this Transition Report on
Form 10-K presents financial information for the nine month period ending
October 3, 1998. The results of operations and cash flows of the Company for
the nine months ended October 3, 1998 contained 276 days and compare to 273
for the unaudited results of operations and cash flows for the nine months
ended September 30, 1997.
Because prior to November 18, 1998 Infoseek Delaware was a wholly owned
subsidiary of Infoseek California that was created for purposes of conducting
the transactions described above, Infoseek Delaware, the Registrant with the
Securities and Exchange Commission, did not conduct business activities in the
nine month fiscal period ended October 3, 1998. Since November 18, 1998,
Infoseek Delaware's business has primarily consisted of holding the capital
stock of Infoseek California and Starwave. Accordingly, although the
transaction with Disney did not occur until November 18, 1998, for purposes of
comparison this Transition Report on Form 10-K presents, separately,
historical information as of and for the nine month fiscal period and prior
periods for Infoseek California and for the twelve months ended October 4,
1998 and prior periods for Starwave. The acquisition of Starwave has been
accounted for under the purchase method of accounting and the financial
positions, results of operations and cash flows of Infoseek and Starwave will
be presented on a combined basis beginning November 18, 1998, the date that
the purchase was consummated. As a result, information presented herein may
not be directly comparable to combined results in subsequent quarters.
Selected Consolidated Financial Information
The following tables present selected consolidated financial information for
Infoseek and Starwave. This information has been derived from their respective
consolidated financial statements and notes, certain of which are included
elsewhere herein.
The financial information of Infoseek including the consolidated statement
of operations data set forth below with respect to the nine months ended
October 3, 1998 and the years ended December 31, 1997 and 1996, and the
balance sheet data at October 3, 1998 and December 31, 1997 are derived from,
and are qualified by reference to, the audited consolidated financial
statements of Infoseek included elsewhere herein. The consolidated statement
of operations data with respect to the nine months ended September 30, 1997
are derived from the unaudited consolidated financial statements of Infoseek
included elsewhere herein. The consolidated statement of operations data with
respect to the years ended December 31, 1995 and 1994 and the balance sheet
data at December 31, 1996, 1995 and 1994 are derived from, and are qualified
by reference to, the audited consolidated financial statements of Infoseek,
which are not included herein. In the opinion of Infoseek's management,
unaudited consolidated financial information included herein reflect all
adjustments, which are of a normal recurring nature, necessary for the fair
presentation of such unaudited consolidated financial information.
The financial information of Starwave including the statement of operations
data set forth below with respect to the year ended October 4, 1998, the nine
months ended September 28, 1997 and the year ended December 31, 1996 and the
balance sheet data at October 4, 1998, September 28, 1997 and December 31,
1996 are derived from, and are qualified by reference to, the audited
consolidated financial statements of Starwave included elsewhere herein. The
statement of operations data with respect to the year ended December 31, 1995,
and the balance sheet data at December 31, 1995, are derived from, and are
qualified by reference to, the audited consolidated financial statements of
Starwave, which are not included herein. The statement of operations data and
balance sheet data for the year ended and as of December 31, 1994 are derived
from the unaudited consolidated financial statements of Starwave which are not
included herein.
The selected historical financial information for Starwave, as of and for
the year ended December 31, 1994 has been derived from unaudited interim
consolidated financial statements, and in the opinion of management reflects
all adjustments, which are of a normal recurring nature, necessary for the
fair presentation of such unaudited interim consolidated financial
information.
34
<PAGE>
Infoseek Selected Consolidated Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Years Ended December 31,
October 3, September 30, ------------------------------------
1998 1997 1997 1996 1995 1994
---------- ------------- -------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data(3):
Total revenues.......... $50,715 $ 22,407 $ 35,082 $ 15,095 $ 1,032 --
Costs and expenses:
Hosting, content and
website costs......... 7,956 4,397 6,319 3,194 614 --
Research and
development........... 7,432 5,879 7,900 4,550 1,175 $ 1,063
Sales and marketing.... 35,144 22,520 34,320 20,455 1,488 97
General and
administrative........ 7,876 5,242 7,042 4,177 1,148 360
Restructuring and other
charges(1)............ -- 7,349 7,349 -- -- --
------- -------- -------- -------- ------- -------
Total costs and
expenses.............. 58,408 45,387 62,930 32,376 4,425 1,520
------- -------- -------- -------- ------- -------
Operating loss.......... (7,693) (22,980) (27,848) (17,281) (3,393) (1,520)
Interest income, net.... 1,999 1,066 1,286 1,343 97 10
------- -------- -------- -------- ------- -------
Net loss................ $(5,694) $(21,914) $(26,562) $(15,938) $(3,296) $(1,510)
======= ======== ======== ======== ======= =======
Basic and diluted net
loss per share (pro
forma in 1995)(2)...... $ (0.19) $ (0.83) $ (1.00) $ (0.72) $ (0.21)
======= ======== ======== ======== =======
Shares used in computing
basic and diluted net
loss per share......... 30,512 26,270 26,627 22,120 15,535
</TABLE>
<TABLE>
<CAPTION>
December 31,
October 3, ---------------------------
1998 1997 1996 1995 1994
---------- ------- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance sheet Data(3):
Cash, cash equivalents and short-term
investments........................... $51,868 $31,439 $46,653 $1,626 $568
Working capital........................ 48,188 19,018 41,997 93 458
Total assets........................... 101,656 51,489 58,332 5,123 859
Long-term obligations.................. 2,981 4,493 1,892 838 210
Total shareholders' equity............. 66,717 27,006 48,985 2,142 520
</TABLE>
- --------
(1) During the second quarter of 1997, Infoseek recorded restructuring and
other charges of approximately $7.4 million related to the discontinuance
of certain business arrangements that were determined to be non-strategic
and to management changes.
(2) The loss per share amounts prior to 1997 and for the nine months ended
September 30, 1997 have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, Earnings per Share and Staff
Accounting Bulletin No. 98, Earnings per Share.
(3) Infoseek's consolidated financial statements for 1997 have been restated
to reflect the acquisition of WebChat Communications, Inc. ("WebChat"),
which has been accounted for as a pooling-of-interests. Prior to 1997,
amounts for WebChat were not significant compared to those of Infoseek
and, accordingly, Infoseek's consolidated financial statements were not
restated. In addition, Infoseek's consolidated financial statements do not
reflect any Starwave-related activity as the acquisition of Starwave
occurred on November 18, 1998.
35
<PAGE>
Starwave Selected Consolidated Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Nine Months Fiscal Years Ended
Ended Ended December 31,
October 4, September 28, -------------------------------
1998 1997 1996 1995 1994
----------- ------------- -------- -------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data(1):
Revenues................ $ 5,266 $ 4,892 $ 8,302 $ 1,111 $ --
Cost of online
services............... 3,143 7,185 18,170 6,577 --
Total operating
expenses............... 7,234 12,906 34,645 17,525 7,469
Loss from joint
ventures............... (14,159) (8,209) -- -- --
Net other income
(expense).............. 701 (1,350) (5,333) (3,015) (6,079)
Loss from continuing
operations............. (15,426) (17,573) (31,676) (19,429) (8,848)
Loss from discontinued
operations............. -- -- (4,289) (7,474) (4,700)
Net loss................ (15,426) (17,573) (35,965) (26,903) (13,548)
Basic and diluted net
loss per share from
continuing operations.. (0.16) (0.25) (0.99) (0.68) (0.50)
Basic and diluted net
loss per share from
discontinued
operations............. -- -- (0.14) (0.27) (0.27)
Basic and diluted net
loss per share......... (0.16) (0.25) (1.13) (0.95) (0.77)
Shares used in computing
basic and diluted net
loss per share......... 96,475 71,691 31,958 28,412 17,502
Balance Sheet Data (at
end of period):
Total assets............ $ 15,812 $ 29,461 $ 9,713 $ 6,354 $ 5,955
Loans from shareholder.. -- -- 84,888 51,025 22,950
Total shareholders'
equity (deficit)....... 8,885 23,614 (82,456) (46,653) (19,751)
</TABLE>
- --------
(1) In April 1997 Starwave entered into the ESPN Joint Venture and the ABCNews
Joint Venture. Subsequently, Starwave continued its business of website
hosting, software development and research activities while revenue and
expenses associated with sites operated under contract with ESPN, ABC and
others were assumed by these Joint Ventures. As a result, periods prior to
and following April 1997 are not comparable.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that are subject to risks and uncertainties. These
forward-looking statements are typically denoted in this Report by the phrases
"anticipates," "believes," "expects," "plans" and similar phrases. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the factors set forth in "Risk Factors" beginning on
page 18 of this Transition Report on Form 10-K, including, without limitation,
those entitled "--Accounting Charges From Acquisitions Will Delay and Reduce
Profitability," "--In Order to Continue to Grow, Infoseek Will Need More
Financing," "--Infoseek's Financial Results Will Vary," "--If Infoseek Cannot
Renew Existing or Enter Into New Agreements Which Result in User Traffic, or
If Sites That Provide Traffic to Infoseek are Not Successful, Infoseek's
Advertising Revenue Will Decrease," "--Infoseek Has Had Losses in the Past and
Has Difficulty Predicting Future Results But Expects Fluctuations and Losses
in the Future," "--If Infoseek Does Not Achieve Revenue Minimums Under
Representation Agreements, It May Incur Losses Under These Agreements," and
"--If Infoseek Advertising and Related Sponsorship of Infoseek Services Are
Not Accepted, Infoseek's Revenues Will Be Adversely Affected." The discussion
of those risk factors is incorporated herein by this reference as if said
discussion was fully set forth at this point.
Explanatory Note
On January 28, 1999, Infoseek changed to a fiscal year with 52 or 53 week
periods ending on the Saturday nearest September 30. As a result, pursuant to
the rules of the Securities and Exchange Commission, this Transition Report on
Form 10-K presents financial information for the nine month period ending
October 3, 1998. The results of operations and cash flows of the Company for
the nine months ended October 3, 1998 contained 276 days and compare to 273
days for the unaudited results of operations and cash flows for the nine
months ended September 30, 1997.
Because prior to November 18, 1998 Infoseek Delaware was a wholly owned
subsidiary of Infoseek California that was created for purposes of conducting
the transactions described above, Infoseek Delaware, the Registrant with the
Securities and Exchange Commission, did not conduct business activities in the
nine month fiscal period ended October 3, 1998. Since November 18, 1998,
Infoseek Delaware's business has primarily consisted of holding the capital
stock of Infoseek California and Starwave. Accordingly, although the
transaction with Disney did not occur until November 18, 1998, for purposes of
comparison this Transition Report on Form 10-K presents, separately,
historical information as of and for the nine month fiscal period and prior
periods for Infoseek California and for the twelve months ended October 4,
1998 and prior periods for Starwave. The acquisition of Starwave has been
accounted for under the purchase method of accounting and the financial
positions, results of operations and cash flows of Infoseek and Starwave will
be presented on a combined basis beginning November 18, 1998, the date that
the purchase was consummated. As a result, information presented herein may
not be directly comparable to combined results in subsequent quarters.
Infoseek Overview
Infoseek was formed in August 1993 to develop and provide Internet and World
Wide Web search and navigational services. From inception to March 31, 1995,
Infoseek's operations were limited and consisted primarily of start-up
activities, including recruiting personnel, raising capital, research and
development, and the negotiation and execution of an agreement to license an
information retrieval search engine.
Infoseek introduced its first products and services in 1995. Through
September 1997, Infoseek's strategic focus was on developing its capabilities
as an Internet search and navigation service. In response to rapid growth and
a change in the Internet search and navigation market, Infoseek's Board of
Directors, in June 1997, hired a new Chief Executive Officer, Harry Motro, to
evolve the strategic vision of Infoseek while continuing to leverage
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<PAGE>
Infoseek's core strength in search and navigation. Mr. Motro and founder
Steven Kirsch recruited a number of new members to the executive management
team to execute Infoseek's strategy of building Infoseek brand awareness;
creating a richer viewer experience; maximizing value for Infoseek's
advertisers; providing intranet search products; and enhancing Infoseek's
search and navigation service. In June 1997, Infoseek took a restructuring
charge of approximately $7.4 million related to the discontinuance of certain
non-strategic business arrangements and management changes.
Beginning in early 1997, Infoseek began to license its Ultraseek Server
product to corporate customers for use on their intranet and public web site
search applications. Such licensing revenues represented approximately 11% of
total revenues for the nine month period ended October 3, 1998. For the nine
month period ended September 30, 1997, licensing revenues represented
approximately 6% of total revenues. Gross margins from licensing Ultraseek and
advertising revenues are not materially different; thus a change in the level
of this licensing business (either an increase or decrease in relative
percentage of revenue) is not expected to have a material effect on Infoseek's
gross margin or profit margin in the future.
In October 1997, Infoseek launched an enhanced version of the Infoseek
Service, with easy to navigate "channels" (now called "centers" and numbering
18) that integrate search results with relevant information, services,
products and communities on the Internet. The Infoseek Service provides
Infoseek with a platform for creating content and marketing partnerships that
enrich the user's experience while enabling advertisers, sponsors and partners
to more effectively target users.
Beginning with the October 1997 launch of the enhanced version of the
Infoseek Service, Infoseek began to sell channel sponsorships to advertisers,
sponsors and partners. Through the first nine months of 1998, Infoseek entered
into various sponsor and partnership agreements covering 12 of Infoseek's 18
channels. The duration of Infoseek's sponsorship and partnership agreements
range from two months to three years and revenues are generally recognized
ratably over the term of the agreements, provided that minimum impressions are
met, and are included in advertising revenues.
Infoseek's revenues for the first nine months of 1998 were approximately
$50.7 million, representing a 126% increase as compared to revenues for the
first nine months of 1997 of approximately $22.4 million. Average daily page
views increased to 21.4 million in September 1998 from 20.3 million average
daily page views in June 1998. For the nine months ended October 3, 1998,
advertising and related sponsorship revenues accounted for approximately 89%
of total revenues compared with 94% for the same period of 1997. Most of
Infoseek's contracts with advertising customers have terms of three months or
less, with options to cancel at any time.
Infoseek's significant growth and limited operating history in a rapidly
evolving industry make it difficult to manage operations and predict future
operating results. Infoseek has incurred significant net losses since
inception and expects to incur substantial additional losses. As of October 3,
1998, Infoseek had an accumulated deficit of approximately $53.7 million.
Infoseek and its prospects must be considered in light of the risks, costs and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in the new and rapidly evolving Internet
market. In addition, because the acquisitions of Starwave and Quando are large
and complex, Infoseek may be required to reorganize its operations in order to
operate more effectively. For example, in January 1999, Infoseek reorganized
all of its product and engineering related efforts into a single department to
become more functional and efficient. Due to the complexity and scale of
Infoseek's recent acquisitions, Infoseek's operating plans and forecasts,
including its projected business outlook, and Infoseek's operating objectives,
are subject to frequent revision. Although Infoseek has recently begun a new
multi-year planning cycle, future events and plans may cause Infoseek to
dramatically revise its business objectives and estimates of profitability.
Infoseek cannot assure you it will be able to adequately address the
challenges of the Internet market and the complexity of its recent
acquisitions. Although Infoseek has experienced significant revenue growth in
1997 and 1998, there can be no assurance that this growth rate will be
sustained, that revenues will continue to grow or that Infoseek will achieve
profitability. Actual results may vary as a result of a number of factors,
including those set forth above and including "Risk Factors--If GO Network is
Not Successful, Infoseek's Business Would Be Seriously Harmed," "--If Infoseek
Encounters Difficulties in Integrating
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<PAGE>
Starwave and Quando, Infoseek Will Not Experience All of the Expected Benefits
of these Acquisitions," and "--Infoseek's Financial Results Will Vary." In
1997 and 1998, Infoseek significantly increased its operating expenses as a
result of a substantial increase in its sales and marketing operations,
development of new distribution channels, broadening of its customer support
capabilities and funding of greater levels of research and development.
Further increases in operating expenses are planned in the future. To the
extent that any such expenses are not timely followed by increased revenues,
Infoseek's business, results of operations, financial condition and prospects
would be materially adversely affected.
As a result of Infoseek's limited operating history as well as the recent
emergence and rapid pace of change and development of both the Internet and
intranet markets addressed by Infoseek, Infoseek has neither internal nor
industry-based historical financial data for any significant period of time
upon which to project revenues or base planned operating expenses. Infoseek
expects that its results of operations may also fluctuate significantly in the
future as a result of a variety of factors, including: the Starwave
Acquisition (as described below); development of GO Network; the continued
rate of growth; usage and acceptance of the Internet and intranets as
information media; the rate of acceptance of the Internet as an advertising
medium and a channel of commerce; demand for Infoseek's products and services;
the advertising budgeting cycles of individual advertisers; the introduction
and acceptance of new, enhanced or alternative products or services by
Infoseek or by its competitors; Infoseek's ability to anticipate and
effectively adapt to a developing market and to rapidly changing technologies;
Infoseek's ability to attract, retain and motivate qualified personnel;
initiation, implementation, renewal or expiration of significant contracts
with Borders Online, Inc., AT&T, N2K, Microsoft, Netscape and others; pricing
changes by Infoseek or its competitors; specific economic conditions in the
Internet and intranet markets; general economic conditions; and other factors.
Substantially all of Infoseek's revenues have been generated from the sale of
advertising and sponsorships, and Infoseek expects to continue to derive
substantially all of its revenues from selling advertising and related
products for the foreseeable future. Moreover, many of Infoseek's contracts
with advertising customers have terms of three months or less. Advertising
revenues are tightly related to the amount of traffic on Infoseek's services,
which is seasonal and inherently unpredictable. Accordingly, future sales and
operating results are difficult to forecast. In addition, Infoseek has relied
on the purchase of traffic from Netscape, Microsoft and others as a
significant portion of Infoseek's total traffic. Infoseek originally entered
into an agreement with Netscape in June 1998. Under the June agreement,
Infoseek purchased 15% of Netscape's available search traffic, which traffic
had decreased from 30% in the prior year. In November 1998, Infoseek and
Netscape renegotiated the terms of the June agreement to provide for the
purchase of 5% of Netscape's available search traffic from January 11, 1999
and through the duration of the agreement which terminates May 31, 1999.
Traffic on the Infoseek Service increased 17% in September 1998 compared to
June 1998 and saw reduced dependence on traffic purchased from Netscape.
September traffic from lower-revenue generating pages, in particular chat
pages, were down 10% from the month of June 1998. In addition, page views
sourced from Netscape declined from 13% of total page views in June 1998 to
12% of total page views in September 1998. While Infoseek believes that it now
has a better balance in the sources of its traffic, as Netscape comprised only
12% of total traffic and Microsoft provided 9% of total traffic in the month
of September 1998, if total traffic declines or does not continue growing,
Infoseek's business, results of operations and financial condition and
prospects could be materially adversely affected.
Infoseek's expense levels are based, in part, on its expectations as to
future revenues and, to a significant extent, are relatively fixed, at least
in the short term. Infoseek may not be able to adjust spending in a timely
manner to compensate for any future revenue shortfall. Accordingly, any
significant shortfall in relation to Infoseek's expectations would have an
immediate material adverse impact on Infoseek's business, results of
operations, financial condition and prospects.
In addition, Infoseek may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a short-term
material adverse effect on Infoseek's business, results of operations,
financial condition and prospects and which may not generate the long-term
benefits intended. From time to time, Infoseek has entered into and may
continue to enter into strategic relationships with companies for cross
service
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advertising, such as Infoseek's relationship with Borders Online, Inc.
Infoseek's revenues have in the past been, and may in the future continue to
be, partially dependent on its relationships with its strategic partners. Such
strategic relationships have and may continue to include substantial one-time
or up front payments from Infoseek's partners. Accordingly, Infoseek believes
that its quarterly revenues are likely to vary significantly in the future,
that period-to-period comparisons are not necessarily meaningful and that such
comparisons should not necessarily be relied upon as an indication of
Infoseek's future performance. Due to the foregoing factors, it is likely that
in future periods, Infoseek's operating results may be below the expectations
of public market analysts and investors. In such event, the price of
Infoseek's common stock would likely be materially adversely affected. See
"Risk Factors--Infoseek Has Had Losses in the Past and Has Difficulty
Predicting Future Results But Expects Fluctuations and Losses in the Future,"
"--Infoseek's Stock Price Will Fluctuate," "--Infoseek's Financial Results
Will Vary," "--If Infoseek Cannot Renew Existing or Enter Into New Agreements
Which Result In User Traffic, or If Sites That Provide Traffic to Infoseek Are
Not Successful, Infoseek's Advertising Revenue Will Decrease," "--Infoseek's
Future Success Depends on the Continuation and Integration of Joint Venture
Relationships and on Entering Into New Third Party Relationships" and "--If
the Internet and Electronic Commerce Do Not Continue to Grow, Infoseek's
Business Will Suffer."
WebChat Acquisition. On April 17, 1998, Infoseek acquired WebChat
Communications, Inc. ("WebChat") in a tax-free reorganization in which a
wholly-owned subsidiary of Infoseek was merged directly into WebChat. Infoseek
exchanged approximately 316,000 shares of Infoseek common stock and reserved
approximately 11,000 shares of Infoseek common stock for WebChat options
assumed by Infoseek. Merger related costs, which were not significant, were
expensed in the second quarter of 1998. The WebChat merger was accounted for
under the pooling-of-interests method.
Disney Transaction. In June 1998, Infoseek entered into agreements with
Starwave and Disney relating to an acquisition of Starwave, of which Disney
was the principal shareholder, by Infoseek through a merger and exchange of
shares (the "Starwave Acquisition") pursuant to an Agreement and Plan of
Reorganization (the "Starwave Merger Agreement"). The transactions
contemplated by the Starwave Merger Agreement were completed on November 18,
1998. In accordance with the Starwave Merger Agreement, Infoseek issued
25,932,681 shares of Infoseek common stock for all outstanding Starwave
shares. Infoseek also reserved 2,205,316 shares of Infoseek common stock for
Starwave stock options assumed by Infoseek. The fair value of Infoseek's
shares and options issued was approximately $897.8 million. In connection with
the Disney Transaction, Infoseek incurred direct costs of approximately $2.8
million as of October 3, 1998 and estimates that it will incur total direct
costs of approximately $22.0 million, which were accounted for as part of the
purchase price of the transactions. The $22.0 million in merger costs includes
approximately $8.6 million for liabilities related to involuntary employee
termination benefits and relocations of Starwave employees and costs to exit
other Starwave activities, primarily operating leases of Starwave. Infoseek
expects to incur additional integration costs of up to $7.0 million, of which
$1.4 million were included in the results for the quarter ended October 3,
1998. The remaining integration costs of up to $5.6 million will affect future
operations and do not qualify as liabilities in connection with a purchase
business combination. The total purchase price of Starwave was therefore
approximately $919.8 million. The Starwave Acquisition is being accounted for
as a purchase transaction. In addition, Disney purchased an additional
2,642,000 unregistered shares of Infoseek common stock and a warrant, subject
to vesting, to purchase an additional 15,720,000 unregistered shares of
Infoseek common stock in exchange for approximately $70.0 million in cash and
a $139.0 million five-year promissory note. The warrant is intended to enable
Disney to achieve a majority stake in Infoseek over time. There can be no
assurance that Infoseek will not incur additional material charges in
subsequent quarters to reflect additional costs associated with this
transaction, the acquisition of Quando or other transactions. See "Risk
Factors--Accounting Charges From Acquisitions Will Delay and Reduce
Profitability," and "--If Infoseek's Future Acquisitions and Strategic
Transactions Are Not Successful, Infoseek's Business May Suffer."
Disney also has certain contractual rights to maintain its initial
percentage stock and warrant ownership through direct purchases from Infoseek
in the event of dilutive issuances, including issuances pursuant to
financings, acquisitions and employee benefit plans. Infoseek may be required
to sell to Disney certain shares of common stock and issue warrants at prices
below fair market value at the time of purchase which may result in future
material charges adversely affecting Infoseek's results of operations.
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Infoseek and Disney have established a strategic relationship concerning the
development, launch and promotion of GO Network that will combine certain
content, promotion, brands and technologies of Infoseek, Starwave, Disney and
the Joint Ventures. In connection with GO Network, a subsidiary of Disney has
agreed to provide, and Infoseek has agreed to purchase, $165.0 million in
promotional support and activities over five years. See "Business--Promotion"
and "--Relationship with Disney."
Because the acquisition of Starwave is being accounted for under the
purchase method of accounting, the purchase price is being allocated to the
acquired assets and liabilities of Starwave. An in-process research and
development charge of approximately $72.6 million will be recorded in the
quarter ending January 2, 1999. In addition, intangible assets related to
developed technology and assembled workforce of approximately $45.2 million
will be amortized over two years. Intangible assets related to goodwill and
the Joint Ventures of approximately $658.5 million and $178.5 million,
respectively, will be amortized over ten years. Infoseek will begin the
amortization of each of these intangible assets in the quarter ended January
2, 1999. In addition, Infoseek expects to incur increased operating
expenditures associated with the expanded operations resulting from the
transaction, as well as the development, launch and promotion of GO Network.
In this regard, Infoseek has agreed to use commercially reasonable efforts to
meet certain spending requirements for GO Network pursuant to the terms of a
license agreement between Infoseek and Disney related to GO Network (the
"License Agreement"). Subject to adjustment by unanimous vote of the two
member advisory committee established pursuant to a product management
agreement between Infoseek and Disney (the "Product Management Agreement"),
these spending requirements for GO Network for the first three years are $40.5
million, $58.3 million and $64.8 million, respectively. In addition, pursuant
to a promotional services agreement (the "Promotional Services Agreement"),
Infoseek has agreed to purchase $165.0 million in promotional services over a
five-year period for GO Network. The amounts spent on the purchase of
promotional services under the Promotional Services Agreement apply towards
the spending requirements under the License Agreement. As a result, Infoseek's
profitability is expected to be delayed beyond the time when Infoseek, prior
to consummating the Disney Transaction, may have otherwise achieved
profitability. In addition, the size and complexity of the Disney Transaction,
the launch of GO Network and the rapid pace of change and development in the
Internet market make it difficult to predict future results. See "Risk
Factors--Infoseek Has Had Losses in the Past and Has Difficulty Predicting
Future Results But Expects Fluctuations and Losses in the Future."
In connection with the acquisition of Starwave, Infoseek acquired Starwave's
interests in the ABCNews Joint Venture and ESPN Joint Venture with affiliates
of Disney and ESPN, respectively. Under each of the joint venture agreements,
required funding and profits/losses under the Joint Ventures are split 60/40
between the Starwave and Disney entities in loss years and 50/50 in years in
years in which the respective Joint Ventures each net income.
Infoseek (through Starwave) has also agreed to act as a representative of
the Joint Ventures for the sale of advertising and related services for the
Joint Ventures.
Under representation agreements by and among Infoseek, Starwave and each of
the Joint Ventures, each entered into in conjunction with the acquisition of
Starwave, Starwave is engaged by the Joint Ventures on an exclusive basis in
the sale of advertising and other items as designated or approved by the Joint
Ventures and to provide additional services, if any, as the Joint Ventures may
request. Activities with respect to the sale of advertising on the Internet
and other related items include the negotiation, execution, renewal,
amendment, modification or termination of advertising and other related
contracts. Starwave guarantees to the Joint Ventures a minimum quarterly
payment equal to the number of projected page views, multiplied by the minimum
revenue rate. The minimum revenue rate is based on the average advertising
revenue rate per page view of the publicly traded Internet companies included
in activities comparable to those of the Joint Ventures. If a mutually
agreeable rate cannot be determined, then the rate will be based on the Joint
Ventures' 12 month trailing average.
Starwave recognizes revenue on the sale of advertising and other related
items of the Joint Ventures due to its obligations under the representation
agreements. Starwave bears the risk of loss if it fails to bill and collect
amounts sufficient to cover its contractual guaranteed minimum payments. Under
the representation agreements,
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Starwave pays the Joint Ventures for the right to render services the greater
of (i) the guaranteed minimum payment or (ii) actual revenues billed to third
parties for services, in each case less only Starwave's actual and reasonably
allocated costs of providing the services and a profit margin of 5% of such
costs. The obligations of Starwave to pay these representation rights fees are
unconditional. Starwave is required to pay the Joint Ventures regardless of
whether Starwave is able to collect the related outstanding receivables.
Each of the Joint Ventures is accounted for under the equity method since
neither Infoseek nor Starwave have a majority voting interest.
Quando Acquisition. On July 24, 1998, the Company entered into an agreement
to acquire Quando for shares of Infoseek's common stock. On January 15, 1999
Infoseek completed its acquisition of Quando in a tax-free reorganization in
which a wholly-owned subsidiary of Infoseek was merged directly into Quando.
Infoseek issued 396,591 shares of Infoseek common stock and reserved
approximately 26,000 shares of Infoseek common stock for Quando options
assumed by Infoseek. The acquisition of Quando will be accounted for using the
purchase method of accounting. Infoseek will incur an in-process research and
development charge of approximately $4.3 million in the quarter ending April
3, 1999 in connection with this transaction. In addition, intangible assets
related to goodwill, developed technology and assembled workforce are
approximately $17.7 million and will be amortized over two years.
Quando Acquisition. On July 24, 1998, the Company entered into an agreement
to acquire Quando for shares of Infoseek common stock. On January 15, 1999
Infoseek completed its acquisition of Quando in a tax-free reorganization in
which a wholly-owned subsidiary of Infoseek was merged directly into Quando.
Infoseek issued approximately 396,591 shares of Infoseek common stock and
reserved approximately 26,000 shares of Infoseek common stock for Quando
options assumed by Infoseek. The acquisition of Quando will be accounted for
using the purchase method of accounting. Infoseek will incur an in-process
research and development charge of approximately $4.3 million in the quarter
ending April 3, 1999 in connection with this transaction. In addition,
intangible assets related to goodwill, developed technology and assembled
workforce are approximately $17.7 million and will be amortized over two years
from the date of acquisition. In connection with the acquisition of Quando,
Infoseek incurred direct costs of approximately $1.5 million which will be
accounted for as part of the purchase price of the transaction. In addition,
Infoseek expects to incur additional integration costs of up to $0.5 million
in the quarter ending April 3, 1999.
WebTV Transaction. On August 28, 1998 Infoseek entered into an agreement
with WebTV pursuant to which Infoseek will be the exclusive provider of search
and directory services to WebTV. Under this two year agreement, Infoseek is
responsible for managing advertising sales for all of WebTV's search traffic
and the substantial majority of WebTV's current non-search traffic. Pursuant
to the agreement, Infoseek is obligated to make cash payments to WebTV
totaling $26.0 million over a two year period, with $0.5 million paid upon the
signing of the agreement, $14.5 million to be paid in advance for the first
five quarters upon mutual acceptance of the technology by both parties and the
remaining $11.0 million to be paid ratably over the last three quarters of the
agreement term. On October 1, 1998, Infoseek and WebTV agreed on the
technology; however, cash was not paid until the first quarter of the fiscal
1999. Therefore, the Company recorded a liability and a corresponding
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asset in the amount of $14.5 million as of October 3, 1998. The payments under
the WebTV agreements are being amortized ratably over the period covered by
the payment, on a straight-line basis. Such payments by Infoseek
are subject to reimbursement depending on the number of impressions delivered
over the life of the agreement. Infoseek is to receive all of the revenue
generated from such advertising sales up to a pre-determined amount that is in
excess of Infoseek's total payment obligations to WebTV under the agreement,
with allocations of such revenue between Infoseek and WebTV being made beyond
this pre-determined amount. There can be no assurance that Infoseek will be
able to sell the available advertising inventory of WebTV under this agreement
or be able to collect the receivables resulting from such advertising sales,
which could have a material adverse effect on Infoseek's business, results of
operations and financial condition.
Microsoft Agreement. On October 1, 1998, the Company entered into an
agreement with Microsoft to become one of five premier providers of search and
navigation services on Microsoft's network of Internet products and services.
Under the terms of the twelve month Microsoft agreement, the Company is
obligated to pay an aggregate of $10.7 million for a guaranteed minimum number
of impressions on both Microsoft's Internet Explorer search feature and
Microsoft's website. The Company will also pay, based on the number of
impressions delivered, for additional impressions on both Internet Explorer
and Microsoft's website, up to a maximum of $18.0 million. The obligated
amount under the Microsoft agreement is being amortized on a straight-line
basis over the one-year term of the agreement, beginning in the quarter ended
January 2, 1999, the quarter when the service was launched. In connection with
the agreement, the Company made a prepayment of $5.3 million as of October 3,
1998, which was included in prepaid to service providers. For the three months
ended January 2, 1999, the Company amortized $2.6 million under this agreement
leaving a prepaid balance of $2.7 million.
GO Network and Enhanced Infoseek Service. In December 1998, Infoseek
launched a beta version of GO Network and in January 1999, Infoseek launched
the premier version of GO Network and an enhanced version of the Infoseek
Service, with a similar user interface to GO Network. GO Network and the
enhanced Infoseek Service are comprehensive Internet gateways that combine
branded content from media leaders, search and navigation with directories of
relevant information and content sites, community applications for
communicating shared interests such as chat and instant messaging, and which
facilitate the purchase of related good and services. GO Network and the
enhanced Infoseek Service have several unique features, such as universal
registration and navigation, universal personalization, and GO Guardian and
security, and also offer content from Disney and its affiliates, including ABC
News and ESPN. Infoseek expects to transition users from the Infoseek Service
to GO Network and may in the future redirect Infoseek Service users to the GO
Network home page. As a result of the launch of GO Network and the enhanced
Infoseek Service, Infoseek expects to have increased costs and operating
expenses in future periods.
Infoseek Results of Operations
For the Nine Months Ended October 3, 1998 and September 30, 1997
Total Revenues
For the nine months ended October 3, 1998 and September 30, 1997, total
revenues were $50,715,000 and $22,407,000, respectively. During the first nine
months of 1998 and 1997, Infoseek derived a substantial majority of its
revenues from the sale of advertisements and sponsorships on its Web pages.
For the nine months ended October 3, 1998 and September 30, 1997, advertising
revenues were $45,044,000 and $21,062,000, respectively, representing 89% and
94% of total revenues in these periods. The growth in advertising and related
revenues is attributable to the increased use of the Internet for information
publication, distribution and commerce coupled with the development and
acceptance of the Internet as an advertising medium and increased viewer
traffic on the Infoseek service. Infoseek expects to continue to derive a
substantial majority of its revenues for the foreseeable future from selling
advertising and sponsorship space on its websites. Advertising revenues are
derived principally from short-term advertising contracts in which Infoseek
guarantees a minimum number of impressions (displays of an advertisement to
the viewer) for a fixed fee. Advertising revenues are recognized ratably over
the term of the contract during which services are provided and are stated net
of customer discounts.
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To the extent minimum guaranteed impressions are not met, Infoseek defers
recognition of the corresponding revenue until the remaining guaranteed
impression levels are achieved. Deferred revenue is comprised of billings in
excess of recognized revenue related to advertising contracts. Also included
in advertising revenues is the exchange by Infoseek of advertising space on
Infoseek's websites for reciprocal advertising space or traffic in other media
publications or other websites or receipt of applicable goods and services.
Revenues from these exchange transactions are recorded as advertising revenues
at the estimated fair value of the goods and services received and are
recognized when both Infoseek's advertisements and reciprocal advertisements
are run or applicable goods or services are received. Although such revenues
have not exceeded 10% of total revenues in any period to date, Infoseek
believes these exchange transactions are of value, particularly in the
marketing of the Infoseek brand, and expects to continue to engage in these
transactions in the future. In late 1997, Infoseek released an enhanced
version of its service which now features 18 "centers," designed to bring
together topical information, services, products and communities on the Web.
The enhanced version of the service provides
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additional opportunities for revenue from the sale of center sponsorships and
in some circumstances enables Infoseek to share in a portion of the revenue
generated by its users with these center sponsors. Revenue generated by center
sponsors is included in advertising revenues and is recognized on a straight-
line basis over the terms of the agreements provided that minimum impressions
are met. The balance of total revenues was derived from the licensing of the
Ultraseek Server product to businesses for internal use in their intranets,
extranets or public sites. For the nine months ended October 3, 1998 and
September 30, 1997, licensing revenue represented approximately 11% and 6%,
respectively, of total revenues. Infoseek's current business model is to
generate revenues through the sale of advertising on the Internet. There can
be no assurance that current advertisers will continue to purchase advertising
space and services from Infoseek or that Infoseek will be able to successfully
attract additional advertisers.
Costs and Expenses
Infoseek's operating expenses increased in absolute dollars during the first
nine months of 1998 compared to the first nine months of 1997 as Infoseek
expanded its business and the marketing of its services and products. Infoseek
expects operating expenses to continue to increase in dollar amount in the
future as Infoseek continues to expand its business. Infoseek recorded
aggregate deferred compensation of $6,018,000 in connection with certain stock
options granted through October 3, 1998 of which $352,000 was recorded during
the nine months ended October 3, 1998. The amortization of such deferred
compensation is being charged to operations over the vesting periods of the
options, which are typically four years. For the nine months ended October 3,
1998 and September 30, 1997, Infoseek amortized $314,000 and $717,000,
respectively, in deferred compensation charges. The amortization of this
deferred compensation will continue to have an adverse effect on Infoseek's
results of operations, primarily through 1999. In addition, on August 28, 1998
Infoseek entered into an agreement with WebTV pursuant to which Infoseek will
be the exclusive provider of search and directory services to WebTV and made a
$0.5 million cash payment to WebTV in the quarter ended October 3, 1998. See
"--Infoseek Overview--WebTV Transaction."
Hosting, Content and Website Costs
For the nine months ended October 3, 1998 and September 30, 1997, hosting,
content and website costs were $7,956,000 and $4,397,000, respectively.
Hosting, content and website costs consist primarily of costs associated with
the enhancement, maintenance and support of Infoseek's websites, including
telecommunications costs and equipment depreciation. Hosting, content and
website costs also include costs associated with the licensing of certain
third-party technologies. Hosting, content and website costs increased in the
nine months ended October 3, 1998 and September 30, 1997 as Infoseek added
additional equipment and personnel to support its websites and as royalties
due to certain third parties increased. Infoseek expects its hosting, content
and website costs will continue to increase in absolute dollars and possibly
as a percentage of revenues as it upgrades equipment and maintenance and
support personnel and adds content partners to meet the growing demands for
Web services.
Research and Development
For the nine months ended October 3, 1998 and September 30, 1997, research
and development expenses were $7,432,000 and $5,879,000, respectively.
Research and development expenses consist principally of personnel costs,
consulting and equipment depreciation. Costs related to research, design and
development of products and services have been charged to research and
development expense as incurred. The increase in research and development
expenses for the nine months ended October 3, 1998 over the comparable periods
in 1997 was primarily the result of on-going enhancements to the Infoseek
service and the development and implementation of new technology and products.
Infoseek believes that a significant level of product development expenses is
required to continue to remain competitive in its industry. Accordingly,
Infoseek anticipates that it will continue to devote substantial resources to
product development and that these costs will continue to increase in dollar
amount in future periods. See "--Infoseek Overview--GO Network and Enhanced
Infoseek Service."
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Sales and Marketing
For the nine months ended October 3, 1998 and September 30, 1997, sales and
marketing expenses were $35,144,000 and $22,520,000, respectively. Sales and
marketing expenses consist primarily of advertising, promotional expenses and
compensation of sales and marketing personnel.
Sales and marketing expenses for the nine month periods ended October 3,
1998 and September 30, 1997 included payments made to Netscape pursuant to an
arrangement for the listing of Infoseek's service on the Netscape Web page.
Through April 30, 1998, Infoseek's agreement with Netscape provided for
payments up to an aggregate of $12,500,000 in cash and reciprocal advertising
($10,000,000 in cash and $2,500,000 in reciprocal advertising) to be one of
four non-exclusive premier providers of navigational services (along with
Excite, Lycos, and Yahoo!). The Netscape arrangement was subsequently extended
through May 31, 1998. The payments to Netscape were recognized ratably over
the term of the agreement.
As of June 1, 1998, Infoseek entered into a one-year agreement with Netscape
with terms that provided for Infoseek to pay, based on impressions delivered,
up to an aggregate of $12,500,000 in cash to be one of the six non-exclusive
premier providers of navigational services (along with Excite, Netscape,
Lycos, Alta Vista, and LookSmart). Under terms of the agreement, Infoseek
received 15% of premier provider rotations--the pages served to visitors who
have not selected a preferred provider. In November 1998, Infoseek and
Netscape renegotiated the terms of the June agreement to provide for the
purchase of 5% of Netscape's available search traffic from January 11, 1999
and through the duration of the agreement, which terminates May 31, 1999. The
payments to Netscape are being recognized ratably over the term of the
agreement. Pages sourced from Netscape have declined from 30% a year ago to
13% in June 1998 and 12% in September 1998. A loss of Netscape sourced pages
could have an adverse impact on Infoseek's business, results of operations and
financial condition and prospects. As of October 3, 1998, Infoseek has a cash
commitment ranging from a minimum of $4,150,000 to a maximum of $12,500,000
depending on the level of traffic delivered by Netscape in connection with
this agreement. Under the terms of these agreements, during the nine month
periods ended October 3, 1998 and September 30, 1997, Infoseek paid $6,595,000
and $5,416,000, respectively, to Netscape.
In addition, in July 1997, Infoseek entered into an agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program for 10
Netscape local websites. Infoseek's agreement with Netscape provides for
payments of up to a maximum aggregate of $1,219,000 in cash and reciprocal
advertising over the one-year term of the agreement. During the nine months
ended October 3, 1998 and September 30, 1997, Infoseek recognized sales and
marketing expenses of approximately $506,000 and $100,000, respectively, under
this agreement as a component of sales and marketing expense.
Effective October 1, 1998, Infoseek terminated its then existing agreement
with Microsoft and entered into a new agreement with Microsoft to become one
of five premier providers of search and navigation services on Microsoft's
network of Internet products and services. Under the terms of the new twelve
month Microsoft agreement, Infoseek is obligated to pay an aggregate of
$10,675,000 for a guaranteed minimum number of impressions on both Microsoft's
Internet Explorer search feature and Microsoft's website. Infoseek will also
pay, based on the number of impressions delivered, for additional impressions
on both Internet Explorer and Microsoft's website, up to a maximum of
$18,000,000. The payments to Microsoft will be amortized on a straight-line
basis over the one-year term of the agreement, beginning in the quarter ended
January 2, 1999, the quarter when the service was launched. Prior to October
1, 1998, Infoseek had an agreement with Microsoft to provide navigational
services on certain Microsoft websites through which Infoseek also received
traffic. In exchange for such traffic, Infoseek made available to Microsoft
advertising space on the Infoseek service free of charge.
At the end of the terms of the respective agreements with Netscape and
Microsoft, there can be no assurance that these agreements with Netscape and
Microsoft or other similar agreements can or will be renewed on terms
satisfactory to Infoseek. If Infoseek is unwilling or unable to renew these or
other similar agreements on
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favorable terms or is otherwise unable to develop viable alternative
distribution channels to Netscape and Microsoft, or is otherwise unable to
offset a reduction in traffic from these or other third party sources,
advertising revenues would be adversely affected, resulting in Infoseek's
business, results of operations, financial condition and prospects being
materially and adversely affected. See "Risk Factors--If Infoseek Cannot Renew
Existing or Enter Into New Agreements Which Result In User Traffic, or If
Sites That Provide Traffic to Infoseek Are Not Successful, Infoseek's
Advertising Revenue Will Decrease."
The increase in sales and marketing expenses for the nine months ended
October 3, 1998 over September 30, 1997 was also the result of hiring
additional sales and marketing personnel and an increase in promotional and
advertising activity, including television and other media advertising
campaigns in both 1998 and 1997. Infoseek expects to increase the amount of
promotional and advertising expenses and anticipates hiring additional sales
representatives in future periods.
General and Administrative
For the nine months ended October 3, 1998 and September 30, 1997, general
and administrative expenses were $7,876,000 and $5,242,000, respectively.
General and administrative expenses consist primarily of compensation of
administrative and executive personnel, facility costs and fees for
professional services. The increase in general and administrative expenses for
the nine months ended October 3, 1998 over the comparable periods in 1997 was
the result of hiring additional administrative and executive staff and adding
infrastructure to manage the expansion of the business. Infoseek anticipates
that its general and administrative expenses will continue to increase in
dollar amount as Infoseek continues to expand its administrative and executive
staff.
Restructuring and Other Charges
During the second quarter of 1997, Infoseek recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to the discontinuance of certain business arrangements which were determined
to be non-strategic, and approximately $1,200,000 related to management
changes. Of these restructuring charges, approximately $5,000,000 involved
cash outflows, all of which were completed as of June 30, 1998. Non-cash
restructuring charges of approximately $2,400,000 related primarily to the
write-down of certain non-strategic business assets which were written off in
June 1997.
Income Taxes
Due to Infoseek's loss position, there was no provision for income taxes for
any of the periods presented. At October 3, 1998, Infoseek had federal and
state net operating loss carryforwards of approximately $40,000,000 and
$17,000,000, respectively. The federal net operating loss carryforwards will
expire beginning in 2009 through 2013, if not utilized, and the state net
operating loss carryforwards will expire in the years 1999 through 2013, if
not utilized. Certain future changes in the share ownership of Infoseek, as
defined in the Tax Reform Act of 1986 and similar state provisions, may
restrict the utilization of carryforwards. A valuation allowance has been
recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset due to the lack of earnings history of
Infoseek.
For the Years Ended December 31, 1997 and 1996
Total Revenues
For the years ended December 31, 1997 and 1996, total revenues were
$35,082,000 and $15,095,000, respectively. During 1997 and 1996, Infoseek
derived a substantial majority of its revenues from the sale of advertisements
on its Web pages. Advertising revenues in 1997 and 1996 were $32,941,000 and
$14,951,000, respectively, representing 94% and 99% of total revenues in such
periods. The growth in advertising revenues was attributable to the increased
use of the Internet for information publication, distribution and commerce
coupled with the development and acceptance of the Internet as an advertising
medium and increased viewer traffic on the Infoseek service.
45
<PAGE>
Also included in advertising revenues is the exchange by Infoseek of
advertising space on Infoseek's websites for reciprocal advertising space or
traffic in other media publications or other websites or receipt of applicable
goods and services.
In late 1997, Infoseek released a new version of its service which now
features 18 "centers," designed to bring together topical information,
services, products and communities on the Web. Revenues generated by channel
sponsors is included in advertising revenues and is generally recognized on a
straight-line basis over the terms of the agreements provided that minimum
impressions are met.
In 1997, the balance of total revenues was derived from the licensing of the
Ultraseek Server product to businesses for internal use in their intranets,
extranets or public sites. Licensing of the Ultraseek Server commenced in
early 1997 and represented approximately 6% of total revenues for the year. In
1996, total revenues include $144,000 of subscription fees for a premium
service offered to business and professional users, which was discontinued
during the third quarter of 1996.
Costs and Expenses
Infoseek's operating expenses increased in absolute dollars during 1997 and
1996 as Infoseek has transitioned from the product development stage to the
marketing of its services and products and expansion of its business. Infoseek
recorded aggregate deferred compensation of $5,666,000 in connection with
certain stock options granted through 1997. The amortization of such deferred
compensation is being charged to operations over the vesting periods of the
options, which are typically four years. For the years ended December 31, 1997
and 1996, Infoseek amortized $832,000 and $1,346,000, respectively, related to
stock options. At December 31, 1997, unamortized deferred compensation totaled
$753,000.
Hosting, Content and Website Costs
For the years ended December 31, 1997 and 1996, hosting, content and website
costs were $6,319,000 and $3,194,000, respectively. Hosting, content and
website costs increased in 1997 and 1996 as Infoseek added additional
equipment and personnel to support its websites and as royalties due to
certain third parties increased.
Research and Development
For the years ended December 31, 1997 and 1996, research and development
expenses were $7,900,000 and $4,550,000, respectively. The increase in
research and development expenses for 1997 over 1996 was primarily the result
of ongoing enhancements to the Infoseek service and the development and
implementation of new technology and products. Ultraseek, Infoseek's core
search engine, was released in November 1996, and the Ultramatch technology
and channel products were commercially released during the second and fourth
quarter of 1997, respectively.
Sales and Marketing
For the years ended December 31, 1997 and 1996, sales and marketing expenses
were $34,320,000 and $20,455,000, respectively. The increase in sales and
marketing expenses for 1997 was the result of hiring additional sales and
marketing personnel and an increase in promotional and advertising activity,
including television advertising campaigns, in 1997.
Sales and marketing expenses for the years ended December 31, 1997 and 1996
included payments made to Netscape pursuant to an arrangement for the listing
of Infoseek's service on the Netscape Web page. The original agreement with
Netscape provided for payments of up to an aggregate of $5,000,000 in cash and
reciprocal advertising ($3,500,000 in cash and $1,500,000 in reciprocal
advertising) over the course of the one-year term of the agreement. At
December 31, 1997, Infoseek had approximately $7,555,000 of cash commitment
remaining in connection with this agreement, which included $4,221,000 of
accrued liabilities to service providers.
46
<PAGE>
In addition, in July 1997, Infoseek entered into an agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program for 10
Netscape local websites. Infoseek's agreement with Netscape provides for
payments of up to a maximum aggregate of $1,219,000 in cash and reciprocal
advertising over the one-year term of the agreement. During the year ended
December 31, 1997, Netscape delivered at the minimum exposure level and
Infoseek as a result recognized sales and marketing expenses of approximately
$333,000 under this agreement.
General and Administrative
For the years ended December 31, 1997 and 1996, general and administrative
expenses were $7,042,000 and $4,177,000, respectively. The increase in general
and administrative expenses in 1997 was the result of hiring additional
administrative and executive staff and adding infrastructure to manage the
expansion of the business.
Restructuring and Other Charges
During the second quarter of 1997, Infoseek recorded restructuring and other
charges of approximately $7,400,000, of which approximately $6,200,000 related
to the discontinuance of certain business arrangements which were determined
to be non-strategic, and approximately $1,200,000 related to management
changes. Of these restructuring charges, approximately $5,000,000 involved
cash outflows, of which $3,100,000 had been paid as of December 31, 1997. Non-
cash restructuring charges of approximately $2,400,000 related primarily to
the write-down of certain non-strategic business assets. There were no
material changes to the restructuring plan or in the estimates of the
restructuring costs. As of December 31, 1997, Infoseek had approximately
$1,900,000 remaining in its restructuring reserve.
Infoseek Liquidity and Capital Resources
From inception through May 1996, Infoseek financed its operations and met
its capital expenditure requirements primarily from proceeds derived from the
issuance of equity, convertible debt securities and equipment term loans. In
February 1998, Infoseek completed a follow-on public offering and received
approximately $43,015,000 net of underwriting discounts, commissions and other
offering costs. The proceeds have been and will continue to be used for
general corporate purposes, including expansion of its sales and marketing
efforts, and capital expenditures.
For the nine months ended October 3, 1998, operating activities used cash of
$13,450,000 due primarily to Infoseek's increases in prepaid to service
providers, deposits and other assets and direct acquisition costs, and
decreases in accrued restructuring and accrued liabilities to service
providers, partially offset by depreciation and amortization and an increase
in deferred revenue. For the nine month period ended September 30, 1997,
operating activities used cash of $15,301,000 due primarily to Infoseek's net
loss, partially offset by an increase in deferred revenue. For the nine months
ended October 3, 1998, investing activities used cash of $32,487,000 primarily
related to the net purchases of short-term investments and equipment
purchases. For the nine months ended September 30, 1997, investing activities
provided net cash of $7,282,000, primarily associated with the net
sales/maturities of short-term investments and equipment purchases. Financing
activities generated cash of $43,242,000 and $6,772,000 in the nine months
ended October 3, 1998 and September 30, 1997, respectively, primarily from
Infoseek's follow-on public offering in February 1998 and equipment term loan
proceeds in 1997.
For 1997 and 1996, operating activities used cash of $14,154,000 and
$10,068,000, respectively. The net cash used during these periods was
primarily due to net losses and increases in accounts receivable, partially
offset by increases in accounts payable and accrued liabilities. For 1997,
investing activities generated cash of $6,204,000 primarily related to the
sales/maturities of investments partially offset by purchases of short-term
investments and purchases of property and equipment. For 1996, investing
activities used net cash of $49,827,000 as a result of the net purchase of
short-term investments and purchase of property and equipment. Financing
activities
47
<PAGE>
generated net cash of $7,485,000 and $62,552,000 in 1997 and 1996,
respectively, primarily from term loans proceeds in 1997 and Infoseek's
initial public offering in June 1996.
Infoseek has cash commitments to Netscape, Microsoft and WebTV in connection
with certain agreements. Following the Disney Transaction, Infoseek also has
commitments to purchase promotion for GO Network from ABC pursuant to a
promotional services agreement, make guaranteed minimum payments under
representation agreements with the Joint Ventures and minimum funding
commitments for GO Network pursuant to a product management agreement with
Disney and, when it obtains positive EBITA license royalty commitments to
Disney. Infoseek also has commitments for its facilities under operating lease
agreements and expects to continue to incur significant capital expenditures
to support expansion of Infoseek's business. Furthermore, from time to time
Infoseek expects to evaluate the acquisition of products, businesses and
technologies that complement Infoseek's business.
Infoseek had $51,868,000 in cash, cash equivalents and short-term
investments at October 3, 1998. Infoseek currently anticipates that its cash,
cash equivalents, short-term investments, cash flows generated from
advertising revenues, and proceeds from the Disney Transaction will be
sufficient to meet its anticipated needs for working capital and other cash
requirements through at least September 30, 1999. Thereafter, Infoseek may
need to raise additional funds. Infoseek may need to raise additional funds
sooner, however, in order to fund more rapid expansion, to develop new or
enhance existing services or products, to respond to competitive pressures or
to acquire complementary products, businesses or technologies. If additional
funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of the stockholders of Infoseek will be
reduced, stockholders may experience additional dilution and such securities
may have rights, preferences or privileges senior to those of the holders of
Infoseek's common stock. There can be no assurance that additional financing
will be available on terms favorable to Infoseek, or at all. If adequate funds
are not available or are not available on acceptable terms, Infoseek's ability
to fund expansion, take advantage of acquisition opportunities, develop or
enhance services or products or respond to competitive pressures would be
significantly limited. Such limitation could have a material adverse effect on
Infoseek's business, results of operations, financial condition and prospects.
The estimate of the period for which Infoseek expects its available funds to
be sufficient to meet its capital requirements is a forward-looking statement
that involves risks and uncertainties. There can be no assurance that Infoseek
will be able to meet its working capital and other cash requirements for this
period as a result of a number of factors including but not limited to those
described under "Risk Factors--In Order to Continue to Grow, Infoseek Will
Need More Financing."
Starwave Overview
Starwave
Starwave is a producer of Internet-based online services in specific content
areas with broad consumer appeal. Starwave is recognized for its sports, news
and entertainment services. Starwave was organized in December 1991 and
commenced operations in January 1992. From that time through February 1993,
the operations of Starwave were limited to start-up activities, including
recruiting personnel, raising capital, and research and development concerning
the technical feasibility of providing content for delivery to the home over
high bandwidth digital communications, including satellite broadcast. From
March 1993 through December 1994, the primary operating activities of Starwave
included the development of CD-ROM products and the development of online
services.
In 1995, Starwave launched its first online services and also released its
first CD-ROM products. Additionally, Starwave began shifting its focus
primarily toward online services, as management perceived greater long-term
potential in that business segment. These services included, among others,
ESPN.com, NBA.com, NFL.com, NASCAR Online, Outside Online and Mr. Showbiz.
This shift of focus ultimately led to the decision in March 1996 to
discontinue its Multimedia CD-ROM business segment, which was phased out in
1996. See "--Discontinued Operations" below. In March 1995, Starwave and ESPN
entered into an agreement
48
<PAGE>
whereby Starwave became the exclusive producer and distributor of ESPN content
on the Internet through April 1, 2000, which agreement was superceded by the
ESPN Joint Venture in connection with the transactions described in the next
paragraph.
Pursuant to a Stock Purchase Agreement dated as of March 28, 1997 among
Starwave, Starwave's founder, Paul Allen, and Disney (the "Starwave Stock
Purchase Agreement"), Starwave issued and sold to Disney
48--1
<PAGE>
9,967,337 shares of Starwave common stock for aggregate consideration of $82
million (39,869,348 shares after adjustment for the four-for-one stock split
of Starwave common stock declared on October 4, 1997 (the "Starwave Stock
Split")). Starwave used approximately $50 million of those proceeds to repay
the then-outstanding indebtedness owed by it to Mr. Allen, and the remaining
$45.7 million of indebtedness owed by Starwave to Mr. Allen was converted into
5,155,289 shares of Starwave common stock (20,621,156 shares when adjusted for
the Starwave Stock Split). In connection with this transaction, effective
April 1997, Starwave formed its subsidiary, Starwave Partner, and Starwave
Partner entered into the ESPN Joint Venture and the ABCNews Joint Venture with
ESPN Partner and ABC Partner, respectively (with the ESPN Joint Venture
superceding the 1995 agreement between Starwave and ESPN pertaining to
ESPN.com). Following these transactions, Starwave continued its website
hosting, software development and research activities, while the majority of
its website operations costs were allocated to the Joint Ventures. Effective
April 1, 1997, Starwave and the Joint Ventures established a fiscal year end
of the last Sunday in September.
On May 1, 1998, pursuant to a Shareholders Agreement dated as of April 17,
1997 (the "Starwave Shareholders Agreement") among Starwave, Mr. Allen and
Disney, Disney acquired all of the shares of Starwave common stock owned by
Mr. Allen, thereby increasing Disney's percentage ownership of Starwave's
outstanding capital stock from approximately 41% to approximately 91% on a
primary shares basis.
On November 18, 1998, Infoseek acquired all of the outstanding capital stock
of Starwave. See "--Infoseek Overview" and "Business--Relationship with
Disney." As a result of Infoseek's acquisition of Starwave, Infoseek will
present financial information relating to Starwave (including results from the
ABCNews Joint Venture and the ESPN Joint Venture) on a consolidated basis in
the quarter ending January 2, 1999 and future periods.
The ESPN Joint Venture
Effective April 1997, Starwave Partner and ESPN Partner entered into the
ESPN Joint Venture for the production of Internet-based services intended to
appeal to consumer interest in sports-related content areas. Starwave
contributes technical expertise, labor and infrastructure, and ESPN
contributes licensed content, branding and promotion. The ESPN Joint Venture
has a ten-year term and a 50/50 capital ownership structure, and provides ESPN
Partner with credit for on-air promotion. Required funding under the Joint
Venture is split 60/40 between Starwave Partner and ESPN Partner in negative
cash flow years and 50/50 in years in which the Joint Venture achieves
positive cash flow. The ESPN Joint Venture has inherited Starwave
relationships with nationally prominent content and branding partners,
including the NBA, the NFL, and NASCAR. The ESPN Joint Venture's flagship
service is ESPN.com, which provides sports-related content.
The ABCNews Joint Venture
Effective April 1997, Starwave Partner and ABC Partner entered into the
ABCNews Joint Venture for the production of Internet-based services intended
to appeal to consumer interest in news and entertainment-related content
areas. Starwave contributes the technical expertise, labor and infrastructure,
and ABC Partner contributes licensed content. The ABCNews Joint Venture has a
ten-year term and a 50/50 capital ownership structure, and provides ABC
Partner with credit for ABC's on-air promotion. Required funding under the
Joint Venture is split 60/40 between Starwave Partner and ABC Partner in
negative cash flow years and 50/50 in years in which the Joint Venture
achieves positive cash flow. The ABCNews Joint Venture's flagship service is
ABCNEWS.com, which provides world, national, entertainment, health, technology
and business content. The ABCNews Joint Venture's other services include Mr.
Showbiz, Wall of Sound and CelebSite.
Under existing terms (following Infoseek's acquisition of Starwave on
November 18, 1998), the Joint Ventures expire on November 18, 2008, and may be
subject to earlier termination in certain circumstances.
Prior to the formation of the Joint Ventures in April 1997, Starwave had
formed relationships with co-branding partners for certain of its online
services. Starwave bore substantially all the production costs for the
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online services and paid royalties to its co-branding partners. The royalties
were generally computed as a percentage of either advertising or gross
revenues generated from the related online service. Those percentages ranged
from 30% to 50% of such revenues. During this period, Starwave derived the
majority of its revenues from the sale of advertisements and subscription fees
related to premium subscription services and fantasy league services offered
to users of the ESPN.com service. Advertising revenues are derived principally
from advertising placements in which Starwave provides a minimum number of
impressions (displays of an advertisement to the user) for a fixed fee.
Advertising and subscription revenues are recognized ratably over the term of
the period during which services are provided and in the case of advertising
is stated net of commissions. In conjunction with the formation of the Joint
Ventures, the co- branding relationship with ESPN was discontinued. The co-
branding relationships with the NBA, the NFL, and NASCAR were assumed by the
ESPN Joint Venture.
The following selected consolidated financial data is derived from the
consolidated financial statements of Starwave included elsewhere herein and
should be read in conjunction with such financial statements, the related
notes thereto and the other financial information pertaining to Starwave
included elsewhere herein.
Starwave Selected Consolidated Financial Data
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Twelve Months Ended
--------------------------- ------------------------- ------------------------
September 28, September 30, December 31, December 31, October 4, September 28,
1997 1996 1996 1995 1998 1997
------------- ------------- ------------ ------------ ---------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data(1):
Revenues................ $ 4,892 $ 4,583 $ 8,302 $ 1,111 $ 5,266 $ 8,611
Operating expenses
Cost of online
services.............. 7,185 11,046 18,170 6,577 3,143 14,309
Development............ 1,605 5,586 6,138 5,771 1,225 2,157
Sales and marketing.... 1,589 2,872 5,492 1,789 94 4,209
General and
administrative........ 2,527 3,389 4,845 3,388 2,772 3,983
-------- -------- -------- -------- -------- --------
Total operating
expenses.............. 12,906 22,893 34,645 17,525 7,234 24,658
-------- -------- -------- -------- -------- --------
Operating loss.......... (8,014) (18,310) (26,343) (16,414) (1,968) (16,047)
-------- -------- -------- -------- -------- --------
Other income (expense)
Loss from affiliate--
ESPN Joint Venture(2).. (2,251) -- -- -- (4,139) (2,251)
Loss from affiliate--ABC
News Joint Venture(2).. (5,958) -- -- -- (10,020) (5,958)
Interest (expense)
income................. (1,814) (3,187) (4,675) (3,023) 748 (3,302)
Other, net.............. 464 (52) (658) 8 (47) (142)
-------- -------- -------- -------- -------- --------
Net other expenses..... (9,559) (3,239) (5,333) (3,015) (13,458) (11,653)
-------- -------- -------- -------- -------- --------
Loss from continuing
operations............. (17,573) (21,549) (31,676) (19,429) (15,426) (27,700)
-------- -------- -------- -------- -------- --------
Loss from discontinued
operations............. -- (4,289) (4,289) (7,474) -- --
-------- -------- -------- -------- -------- --------
Net loss................ $(17,573) $(25,838) $(35,965) $(26,903) $(15,426) $(27,700)
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) In April 1997 Starwave entered into the ESPN Joint Venture and the ABCNews
Joint Venture. Subsequently, Starwave continued its business of website
hosting, software development and research activities while revenue and
expenses associated with sites operated under contract with ESPN, ABC and
others were assumed by these Joint Ventures. As a result, periods prior to
and following April 1997 are not comparable.
(2) Represents Starwave's proportionate share of the loss (i.e., 60%).
50
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Starwave Results of Operations
From Starwave's commencement of business activities in January 1992 through
the first quarter of 1995, Starwave's operations were limited and consisted
primarily of development of online services and CD-ROMs and other start-up
activities. Starwave first recognized online revenues in the second quarter of
1995. Thereafter until April 1997, the ESPN.com online revenues were the
primary source of Starwave's revenues.
Beginning April 1997, Starwave entered into the Joint Ventures. As a result
of the terms of the Joint Ventures, all business related advertising revenue
and operating expenses are reflected at the Joint Venture level. Accordingly,
following the discussion of Starwave's results of operations below is a
discussion of the Joint Ventures' results of operations in order to make
comparative assessments of the results of operations more meaningful.
Starwave has classified the results of operations of its Multimedia CD-ROM
business segment as discontinued for all periods presented. Accordingly,
except as otherwise indicated, all results of operations information of
Starwave contained herein relate only to continuing operations. See "--
Starwave Discontinued Operations."
Starwave began a new line of business in February 1997 to provide website
hosting operations for Internet services produced by third parties. Revenues
from this line of business have been for consulting services and software
license revenues. The primary customer for such services is Disney.
Comparison of Starwave's Twelve Months Ended October 4, 1998 and September 28,
1997
Revenues
Revenues for the twelve months ended October 4, 1998 and September 28, 1997
were $5,266,000 and $8,611,000, respectively. Beginning April 1, 1997, the
majority of revenues were earned by the Joint Ventures, resulting in a decline
in the total revenue attributable to Starwave for comparable periods.
For the twelve months ended October 4, 1998, $3,139,000 of Starwave's
revenues were derived from website hosting services and $1,779,000 from
software license revenue.
For the twelve months ended September 28, 1997, Starwave recognized
advertising revenues of $5,210,000. Beginning April 1, 1997, all advertising
revenue was earned by the Joint Ventures.
Operating Expenses
Cost of Online Services. Cost of online services consists primarily of site
production and maintenance costs, royalties to co-branding partners, Web
operations and support costs, and fees and royalties paid to content
providers. Costs of online services for the twelve months ended October 4,
1998 and September 28, 1997 were $3,143,000 and $14,309,000, respectively.
Beginning April 1, 1997, all costs incurred for the production of online
services were incurred by the Joint Ventures, which resulted in a decrease in
the costs for the comparable periods.
Development. Development expenses include expenses related to the
development and production of new online services and technologies, including
payroll and related expenses for development staff as well as costs for
content, facilities and equipment. Once an online service is launched and
available to generate revenue, costs associated with enhancements and
development of new features for the service are included with online services
costs. Development costs for the twelve months ended October 4, 1998 and
September 28, 1997 were $1,225,000 and $2,157,000, respectively, representing
23% and 25%, respectively, of total revenues. Beginning April 1, 1997, all
costs incurred for development relating to the Joint Ventures were moved to
the Joint Ventures. Starwave believes that a significant level of development
activity and expense is required in order to remain competitive with other new
and existing online services. Accordingly, Starwave anticipates that it will
continue to devote substantial resources to development and that the absolute
dollar amount of these costs will increase in future periods.
51
<PAGE>
Sales and Marketing. Sales and marketing expenses consist primarily of
payroll and related expenses for sales and marketing personnel, advertising
expenses, as well as related facilities expenses. For the twelve months ended
October 4, 1998 and September 28, 1997, sales and marketing expenses were
$94,000 and $4,209,000, respectively. Beginning April 1, 1997, all costs
incurred for the sales and marketing for the online services were incurred by
the Joint Ventures, resulting in a decrease in the costs for the comparable
periods.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses of executive, finance, legal, human
resources, and information systems personnel. In addition, these costs include
occupancy costs for Starwave, as well as fees for professional services. For
the twelve months ended October 4, 1998 and September 28, 1997, general and
administrative costs were $2,772,000 and $3,983,000, respectively,
representing 53% and 46%, respectively, of total revenues. Beginning April 1,
1997 all costs incurred for general and administrative relating to the Joint
Ventures were moved to the Joint Ventures. If Starwave continues to grow in
size, it may find it necessary to expand its information systems and to expand
or relocate to new or additional locations. As a result, Starwave anticipates
that the absolute dollar amount of general and administrative expenses will
increase in future periods.
Other Income (Expense). From inception through March 31, 1997, other income
(expense) consists primarily of interest expense incurred on the loans made to
Starwave by its majority shareholder. From April 1, 1997 to the current date,
other income (expense) consists mainly of Starwave's proportionate share
(i.e., 60%) of the earnings (losses) from the ABCNews Joint Venture and the
ESPN Joint Venture.
<TABLE>
<CAPTION>
Twelve Months Ended
------------------------
October 4, September 28,
1998 1997
---------- -------------
(Amounts in thousands)
<S> <C> <C>
Loss from the ESPN Joint Venture(1).................... $ (4,139) $(2,251)
Loss from the ABCNews Joint Venture(1)................. (10,020) (5,958)
Interest income (expense).............................. 748 (3,302)
Other expense.......................................... (47) (142)
</TABLE>
- --------
(1) Represents Starwave's proportionate share of the loss (i.e., 60%).
Comparison of Starwave's Nine Months Ended September 28, 1997 and September
30, 1996
Revenues
Revenues for the nine months ended September 28, 1997 and September 30, 1996
were $4,892,000 and $4,583,000, respectively. Beginning April 1, 1997, the
majority of the revenue generating operations was included in the Joint
Ventures. The transfer of revenue generating operations to the Joint Ventures
was mitigated by an increase in revenue in the first three months of the
period resulting from increased acceptance of commerce on the Internet.
Advertising revenues for the nine months ended September 28, 1997 and
September 30, 1996 were $2,446,000 and $3,475,000, respectively, representing
50% and 76%, respectively, of total revenues. Beginning April 1, 1997, all
advertising revenue was earned at the Joint Venture level, resulting in a
decrease in advertising revenue for comparable periods.
Cost of Online Services. Costs of online services for the nine months ended
September 28, 1997 and September 30, 1996 were $7,185,000 and $11,046,000,
respectively. Beginning April 1, 1997, all costs incurred for the production
of online services were incurred by the Joint Ventures, resulting in a
decrease in the costs for the comparable periods.
Development. Development costs for the nine months ended September 28, 1997
and September 30, 1996 were $1,605,000 and $5,586,000 respectively,
representing 33% and 122%, respectively, of total revenues.
52
<PAGE>
Development costs incurred on behalf of the Joint Ventures' websites are
allocated to the Joint Ventures, decreasing Starwave's total development costs
for the comparable periods.
Sales and Marketing. Sales and marketing expenses for the nine months ended
September 28, 1997 and September 30, 1996 were $1,589,000 and $2,872,000,
respectively, representing 32% and 63%, respectively, of total revenues.
Beginning April 1, 1997, all costs incurred for the sales and marketing for
the online services were incurred by the Joint Ventures, resulting in a
decrease in the total costs for the comparable periods. A total of $1,301,000
or 82% of the sales and marketing costs incurred for the nine months ended
September 30, 1997 was incurred before the formation of the Joint Ventures on
April 1, 1997. The remainder of the sales and marketing costs were incurred
due to promotion of the website hosting operations.
General and Administrative. For the nine months ended September 28, 1997 and
September 30, 1996, general and administrative costs were $2,527,000 and
$3,389,000, respectively, representing 52% and 74%, respectively, of total
revenues. Beginning April 1, 1997, general and administrative costs were
allocated to the Joint Ventures, thereby reducing the total expense for the
comparable periods.
Other Income (Expense). From inception through March 31, 1997, other income
(expense) consists primarily of interest expense incurred on the loans made to
Starwave by its majority shareholder. From April 1, 1997 to the current date,
other income (expense) consists mainly of Starwave's proportionate share
(i.e., 60%) of the earnings (losses) from the ABCNews Joint Venture and the
ESPN Joint Venture.
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 28, September 30,
1997 1996
------------- -------------
(Amounts in thousands)
<S> <C> <C>
Loss from the ESPN Joint Venture(1).............. $(2,251) $ --
Loss from the ABCNews Joint Venture(1)........... (5,958) --
Interest expense, net............................ (1,814) (3,187)
Other income (expense)........................... 464 (52)
</TABLE>
--------
(1) Represents Starwave's proportionate share of the loss (i.e., 60%).
Comparison of Starwave's Years Ended December 31, 1996 and 1995
Revenues
Starwave began to generate revenues in the second quarter of 1995. Revenues
for the years ended December 31, 1996 and 1995 were $8,302,000 and $1,111,000,
respectively. For the years ended December 31, 1996 and 1995, advertising
revenues were $6,100,000 and $800,000, respectively, representing 73% and 72%,
respectively, of total revenues.
Operating Expenses
Cost of Online Services. Starwave did not incur any online services costs
until 1995 when Starwave launched its first online services and began
recognizing revenues from these services. Costs of online services for the
years ended December 31, 1996 and 1995 were $18,170,000 and $6,577,000,
respectively.
Development. Development expenses include expenses relating to the
development and production of new online services and technologies, including
payroll and related expenses for development staff as well as costs for
content, facilities and equipment. Once an online service is launched and
available to generate revenue, costs associated with enhancements and
development of new features for the service are included with cost of online
services. Total development expenses were $6,138,000 and $5,771,000 for the
years ended December 31, 1996 and 1995, respectively, representing 74% and
519%, respectively, of total revenues.
53
<PAGE>
Sales and Marketing. Sales and marketing expenses consist primarily of
payroll and related expenses for sales and marketing personnel, advertising
expenses, as well as related facilities expenses. Sales and marketing expenses
for the years ended December 31, 1996 and 1995 were $5,492,000 and $1,789,000,
respectively, representing 66% and 161%, respectively, of total revenues.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses of executive, finance, legal, human
resources, and information systems personnel. In addition, these costs include
occupancy costs for Starwave, as well as fees for professional services.
General and administrative expenses for the years ended December 31, 1996 and
1995 were $4,845,000 and $3,388,000, respectively, representing 58% and 305%,
respectively, of total revenues.
Other Income (Expense). In 1996 and 1995, other income (expense) consists
primarily of interest expense incurred on the loans made to Starwave by its
majority shareholder.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
----------- -----------
(Amounts in thousands)
<S> <C> <C>
Interest expense.................................. $ (4,675) $ (3,023)
Other income (expense)............................ (658) 8
</TABLE>
Interest expense increased during each of the years ended December 31, 1996
and 1995 ($3,023,000 during 1995 from $1,400,000 during 1994) due principally
to the increased magnitude of such loans. As of April 1, 1997, outstanding
loans from Paul Allen to Starwave totaled $95.7 million. As of December 31,
1996, outstanding loans from Paul Allen to Starwave totaled $84.9 million,
versus $51.0 million as of December 31, 1995.
Starwave Discontinued Operations
In 1994, Starwave began developing interactive multimedia CD-ROM products.
Starwave released its first CD-ROM product in November 1995 and released
additional CD-ROMs in 1995 and the first quarter of 1996. In March 1996,
Starwave made the decision to discontinue its Multimedia CD-ROM business
segment, and to phase out these operations by December 31, 1996.
Starwave has reflected the results of operations of the Multimedia CD-ROM
business segment as a discontinued operation for all periods presented. During
the phase-out period, Starwave completed production of its final CD-ROM
product and disposed of its remaining inventory of CD-ROM products.
Losses from operations of the Multimedia CD-ROM segment totaled $4,700,000
in 1994, $7,474,000 in 1995 and $1,046,000 in 1996. The loss on disposal of
the Multimedia CD-ROM segment of $3,243,000 in 1996 included the provision for
operating losses through the phase-out period.
Starwave Income Taxes
Until December 31, 1995, Starwave utilized the provisions of Subchapter S of
the Code. As a result, Starwave's net losses for tax purposes, as well as tax
credits and other tax incidents, were distributed to and included on the
personal income tax returns of its shareholders. Starwave was not required to
record any provision for income taxes, and the net losses and tax incidents of
Starwave through December 31, 1995 will not be available to offset taxes on
Starwave's future net income, if any. Effective January 1, 1996, Starwave
elected to be taxed as a Subchapter C corporation under the Code. The
conversion from S Corporation status to C Corporation status had no impact on
the financial position or results of operations of Starwave. As of October 4,
1998, Starwave had incurred net operating losses of approximately $70.2
million for income tax purposes that may be available to offset a similar
amount of net income for income tax purposes in future periods through 2012.
Starwave has recorded a valuation allowance against the deferred tax asset
generated by the net operating losses and therefore has no deferred tax assets
or liabilities recorded on its balance sheet. Starwave expects that future
operating
54
<PAGE>
losses will result in additional net operating losses for income tax purposes.
The aggregate net operating losses are subject to certain limitations.
Starwave Liquidity and Capital Resources
From inception through March 31, 1997, Starwave financed its operations and
met its capital expenditure requirements primarily through loans received from
Paul Allen, which totaled approximately $95.7 million. In April 1997,
approximately $50 million of such indebtedness to Mr. Allen was repaid using
proceeds received by Starwave upon consummation of the transactions
contemplated by the Starwave Stock Purchase Agreement, and the remaining $45.7
million of such indebtedness to Mr. Allen was converted into 5,155,289 shares
(20,621,156 shares when adjusted for the Starwave Stock Split) of Starwave
common stock. The remaining approximately $32 million of cash proceeds
received by Starwave upon consummation of the transactions contemplated by the
Starwave Stock Purchase Agreement was used to fund Starwave operations.
Net cash used in operating activities of $27,190,000 and $30,060,000 for the
years ended December 31, 1995 and 1996, respectively, was primarily
attributable to net operating losses incurred in such periods. Net cash used
in operating activities for the nine months ended September 28, 1997 of
$6,807,000 was primarily attributable to net operating losses incurred in the
period. Net cash used in investing activities of $2,585,000 and $3,321,000 for
the years ended December 31, 1995 and 1996, respectively, was primarily
attributable to purchases of equipment and leasehold improvements. Net cash
used in investing activities of $13,873,000 for the nine months ended
September 28, 1997 was attributable to purchases of equipment and leasehold
improvements of $1,336,000, and for funding of the ESPN Joint Venture and the
ABCNews Joint Venture of $12,537,000. Net cash provided by operating
activities for the year ended October 4, 1998 of $3,334,000 was the result of
net operating losses offset by non-cash items. Net cash used in investing
activities of $20,390,000 for the year ended October 4, 1998 was attributable
to purchases of equipment and leasehold improvements of $3,182,000 and for
funding of the ESPN Joint Venture and the ABCNews Joint Venture of
$17,208,000. Starwave currently has a commitment for its facilities under a
noncancelable lease agreement that expires in May 2001, subject to extension
at Starwave's option. Starwave also has a commitment for facilities under a
noncancelable lease agreement that expires November 2000, subject to a three-
year extension at Starwave's option.
The ESPN Joint Venture and the ABCNews Joint Venture have entered into
agreements with certain co-branding partners that require the payment of
minimum royalties and/or royalty advances to the co-branding partners. At
October 4, 1998, the ESPN Joint Venture's minimum royalty liability totaled
$6,250,000 and the ABCNews Joint Venture's minimum royalty liability totaled
$750,000. Certain of the co-branding agreements provide for additional royalty
payments if specified targets are met.
From inception of the ESPN Joint Venture and the ABCNews Joint Venture on
April 1, 1997, Starwave has provided 60% of the capital contributions
necessary for the operations of each Venture. For the twelve months ended
October 4, 1998 and for the six months ended September 28, 1997, capital
contributed to the ESPN Joint Venture was $5,735,000 and $5,377,000,
respectively, and cash provided for the ABCNews Joint Venture was $11,483,000
and $8,660,000, respectively.
Starwave's cash requirements were funded by Disney through November 18, 1998
and are now funded by Infoseek.
Year 2000 Compliance
Infoseek is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Virtually every
computer operation will be affected by the "year 2000 problem." Many computer
systems only provide for a two digit date and therefore will not properly
recognize dates when the year changes from 1999 ("99" in most systems) to
2000, since the system may recognize the year as 1900 instead of 2000.
Computer systems that do not properly recognize the year 2000 could generate
incorrect data or cause a system to fail.
55
<PAGE>
Infoseek management has conducted a review of Infoseek's exposure to the
year 2000 problem. Infoseek is working with its major computer system, data
feed and software vendors to determine if they are prepared for the year 2000.
Based on Infoseek's internal review and discussions with these vendors,
Infoseek currently believes that its internal systems are year 2000 compliant
or will be made so with only minor modifications. However, Infoseek does plan
to replace several internal systems as part of a conversion to improved
financial and business systems in connection with upgrade programs in late
1999. Infoseek does not expect to incur significant expenses or to have to
purchase additional computer systems to avoid the year 2000 problem, for
either Infoseek's internal information technology systems or Infoseek's
products and services.
Despite Infoseek's review, the effects of the year 2000 problem are still
very uncertain. Infoseek cannot assure you that its vendors' representations
are accurate. Infoseek has also not investigated year 2000 compliance by third
parties who are not vendors of Infoseek. Infoseek has no control over these
third parties' compliance. For example, if a link on GO Network or the
Infoseek search service points to a website which is not year 2000 compliant,
that link may not be available to users and therefore the Infoseek services
will offer fewer features. If many linked sites do not work, the value of user
traffic and advertising on Infoseek's websites could materially decrease. In
addition, if Infoseek's review of its year 2000 readiness did not uncover all
year 2000 problems, Infoseek does not have a contingency plan to address this
risk and could suffer serious harm or be required to expend resources to
resolve those problems. If Infoseek's systems are not year 2000 compliant,
although Infoseek does not expect any of the following to occur, it may not be
able to input financial data or generate reports and could lose data in its
management information and advertising management systems. In addition, users
of its services could experience reduced functionality and potentially lose
stored user data.
If Infoseek or any of its users, customers, linked sites, advertisers,
vendors or other third parties are not year 2000 compliant, Infoseek's
business, results of operations, financial condition and prospects could be
seriously harmed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Infoseek's exposure to market risk for changes in interest rates relates
primarily to Infoseek's short-term investment portfolio and long-term debt
obligations. Infoseek does not use derivative financial instruments in its
investment portfolio. Infoseek's investments are managed by outside
professional managers within investment guidelines set by Infoseek. Such
guidelines include security type, credit quality and maturity and are intended
to limit market risk by restricting Infoseek's investments to high quality
debt instruments with relatively short-term maturities. Based upon the
weighted-average duration of Infoseek's investments at October 3, 1998, a 1%
(100 basis points) increase in short-term interest rates would result in an
unrealized loss in market value of Infoseek's investments totaling
approximately $75,000. However, because Infoseek's debt securities are carried
as available-for-sale, no gains or losses are recognized by Infoseek due to
changes in interest rates unless such securities are sold prior to maturity.
Infoseek generally holds securities until maturity and carries the securities
at amortized cost, which approximates fair market value. In addition, based
upon the weighted average duration of Infoseek's long-term debt obligations at
October 3, 1998, a 1% (100 basis points) decrease in interest rates would
result in an unrealized loss in market value of Infoseek's long-term debt
obligations of approximately $125,000.
56
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFOSEEK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP................................................. 58
Consolidated Balance Sheets................................................. 59
Consolidated Statements of Operations....................................... 60
Consolidated Statements of Cash Flows....................................... 61
Consolidated Statements of Shareholders' Equity............................. 63
Notes to Consolidated Financial Statements.................................. 65
</TABLE>
57
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Infoseek Corporation
We have audited the accompanying consolidated balance sheets of Infoseek
Corporation as of October 3, 1998 and December 31, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the nine months ended October 3, 1998 and for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Infoseek Corporation at October 3, 1998 and December 31, 1997, and the
consolidated results of its operations and its cash flows for the nine months
ended October 3, 1998 and for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
January 20, 1999
58
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 628 $ 3,323
Short-term investments............................... 51,240 28,116
Accounts receivable, less allowance for doubtful
accounts of $1,675 in 1998 and $980 in 1997......... 6,942 6,921
Prepaid to service providers......................... 20,338 --
Other current assets................................. 998 648
-------- -------
Total current assets............................... 80,146 39,008
Property and equipment:
Computer and office equipment........................ 25,151 16,525
Furniture and fixtures............................... 1,546 935
Leasehold improvements............................... 2,153 1,323
-------- -------
28,850 18,783
Less accumulated depreciation and amortization....... 13,480 8,295
-------- -------
Net property and equipment............................. 15,370 10,488
Direct acquisition costs............................... 2,825 --
Deposits and other assets.............................. 3,315 1,993
-------- -------
Total assets....................................... $101,656 $51,489
======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable..................................... $ 3,560 $ 4,861
Accrued payroll and related expenses................. 2,191 1,630
Accrued liabilities to service providers............. 16,058 4,221
Other accrued liabilities............................ 2,418 2,262
Deferred revenue..................................... 4,789 2,564
Accrued restructuring and other charges.............. -- 1,877
Short-term obligations............................... 2,942 2,575
-------- -------
Total current liabilities.......................... 31,958 19,990
Long-term obligations.................................. 2,981 4,493
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized shares--5,000
No shares issued and outstanding..................... -- --
Common stock, no par value:
Authorized shares--60,000
Issued and outstanding shares--31,508 in 1998 and
27,534 in 1997...................................... 121,292 76,000
Accumulated deficit.................................... (53,724) (48,030)
Deferred compensation.................................. (717) (753)
Notes receivable from shareholders..................... (134) (211)
-------- -------
Total shareholders' equity......................... 66,717 27,006
-------- -------
Total liabilities and shareholders' equity......... $101,656 $51,489
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
Nine Months Ended December 31,
------------------------ ------------------
October 3, September 30,
1998 1997 1997 1996
---------- ------------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Advertising and other
revenues...................... $45,044 $ 21,062 $ 32,941 $ 15,095
Software licensing revenues.... 5,671 1,345 2,141 --
------- -------- -------- --------
Total revenues............... 50,715 22,407 35,082 15,095
Costs and expenses:
Hosting, content and website
costs......................... 7,956 4,397 6,319 3,194
Research and development....... 7,432 5,879 7,900 4,550
Sales and marketing............ 35,144 22,520 34,320 20,455
General and administrative..... 7,876 5,242 7,042 4,177
Restructuring and other
charges....................... -- 7,349 7,349 --
------- -------- -------- --------
Total costs and expenses..... 58,408 45,387 62,930 32,376
------- -------- -------- --------
Operating loss................... (7,693) (22,980) (27,848) (17,281)
Interest income.................. 2,516 1,502 1,943 1,771
Interest expense................. (517) (436) (657) (428)
------- -------- -------- --------
Net loss......................... $(5,694) $(21,914) $(26,562) $(15,938)
======= ======== ======== ========
Basic and diluted net loss per
share........................... $ (0.19) $ (0.83) $ (1.00) $ (0.72)
Shares used in computing basic
and diluted net loss per share.. 30,512 26,270 26,627 22,120
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
Nine Months Ended December 31,
------------------------ ------------------
October 3, September 30,
1998 1997 1997 1996
---------- ------------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $ (5,694) $(21,914) $(26,562) $(15,938)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.. 5,185 3,920 4,849 2,157
Provision for doubtful
accounts...................... 1,045 242 930 651
Writedown of restructure
related assets................ -- -- 2,080 --
Amortization of unearned
compensation related to stock
options....................... 314 717 832 1,347
Changes in operating assets and
liabilities:
Accounts receivable............ (1,066) (2,070) (5,420) (2,580)
Prepaid to service providers... (5,838) -- -- --
Other current assets........... (350) (186) (211) (260)
Direct acquisition costs....... (2,825) -- -- --
Deposits and other assets...... (1,322) (898) (1,490) --
Accounts payable............... (1,301) (1,219) 1,491 2,047
Accrued payroll and related
expenses...................... 561 (237) 253 1,291
Accrued liabilities to service
providers..................... (2,663) 2,357 4,221 --
Other accrued liabilities...... 156 229 1,192 457
Deferred revenue............... 2,225 854 1,804 760
Accrued restructuring and other
charges....................... (1,877) 2,904 1,877 --
-------- -------- -------- --------
Net cash used in operating
activities.................. (13,450) (15,301) (14,154) (10,068)
Cash flows from investing
activities:
Purchases of available-for-sale
investments..................... (151,407) (29,667) (44,769) (92,966)
Proceeds from sales/maturities of
available-for-sale investments.. 128,283 44,428 59,520 50,596
Issuance of notes receivable..... -- -- (950) (600)
Purchase of property and
equipment....................... (9,363) (7,479) (7,597) (6,857)
-------- -------- -------- --------
Net cash provided by (used
in) investing activities.... (32,487) 7,282 6,204 (49,827)
Cash flows from financing
activities:
Proceeds from term loan.......... 133 5,000 5,265 2,573
Repayments of term loan.......... (1,850) (815) (1,082) (763)
Principal payments on capital
leases.......................... (132) -- -- --
Proceeds from issuance of
convertible debt................ -- -- 305 --
Payment of deposit............... -- -- -- (693)
Proceeds from sale of convertible
preferred stock, net of issuance
costs........................... -- -- -- 17,619
Proceeds from sale of common
stock, net of issuance costs.... 43,015 972 1,217 43,785
Proceeds from the exercise of
stock options................... 1,520 1,018 1,183 6
Proceeds from employee stock
purchase plan................... 479 295 295 --
Proceeds from repayment of notes
receivable from shareholders.... 77 302 302 28
Repurchase of common stock....... -- -- -- (3)
-------- -------- -------- --------
Net cash provided by
financing activities........ 43,242 6,772 7,485 62,552
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents............ (2,695) (1,247) (465) 2,657
Cash and cash equivalents at
beginning of period............. 3,323 3,788 3,788 1,129
-------- -------- -------- --------
Cash and cash equivalents at end
of period....................... $ 628 $ 2,541 $ 3,323 $ 3,786
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES
An increase in prepaid to service providers for an increase in accrued
liabilities to service providers amounted to $14,500,000 for the nine months
ended October 3, 1998 and none (unaudited) for the nine months ended September
30, 1997 and none for the years ended December 31, 1997 and 1996. Unearned
compensation related to stock options amounted to $352,000 and none
(unaudited) for the nine months ended October 3, 1998 and September 30, 1997,
respectively, and $440,000 and $3,102,000 for the years ended December 31,
1997 and 1996, respectively. Cash paid for interest expense amounted to
$517,000 and $436,000 (unaudited) for the nine months ended October 3, 1998
and September 30, 1997, respectively, and $657,000 and $428,000 for the years
ended December 31, 1997 and 1996, respectively. Assets acquired under capital
leases totaled $704,000 and none (unaudited) for the nine months ended October
3, 1998 and September 30, 1997, respectively (none for the years ended
December 31, 1997 and 1996).
See accompanying notes to consolidated financial statements.
62
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Receivable Total
----------------- ---------------- Accumulated Deferred From Shareholders'
Shares Amount Shares Amount Deficit Compensation Shareholders Equity
------- -------- ------ -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 15,580 $ 6,695 4,000 $ 2,410 $ (4,833) $(2,080) $ (50) $ 2,142
Cancellation of
convertible preferred
stock issued for
purchased technology... (280) -- -- -- -- -- -- --
Unearned compensation
related to stock
options................ -- -- -- 3,102 -- (3,102) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 1,346 -- 1,346
Issuance of convertible
preferred stock for
cash, net of issuance
costs.................. 2,267 17,619 -- -- -- -- -- 17,619
Repurchases of common
stock.................. -- -- (325) (3) -- -- -- (3)
Issuance of common stock
to officers............ -- -- 787 910 -- -- (610) 300
Cancellation of note
receivable and
repurchase of shares... -- -- (365) (470) -- 290 180 --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 28 28
Conversion of
convertible preferred
stock into common stock
upon the initial public
offering............... (17,567) (24,314) 17,567 24,314 -- -- -- --
Issuance of common stock
in connection with
initial public
offering, net of
issuance costs......... -- -- 3,973 43,485 -- -- -- 43,485
Exercise of common stock
options................ -- -- 54 6 -- -- -- 6
Net loss and
comprehensive net
loss................... -- -- -- -- (15,938) -- -- (15,938)
------- -------- ------ -------- -------- ------- ----- --------
Balance at December 31,
1996................... -- -- 25,691 73,754 (20,771) (3,546) (452) 48,985
Issuance of common stock
and activity from
merger with WebChat
Communications, Inc.... -- -- 167 571 (697) -- -- (126)
Issuance of common stock
for cash............... -- -- 58 1,217 -- -- -- 1,217
Unearned compensation
related to stock
options................ -- -- -- 440 -- (440) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 832 -- 832
Reversal of unearned
compensation........... -- -- -- (2,071) -- 2,071 -- --
Writeoff deferred
compensation related to
restructure............ -- -- -- -- -- 330 -- 330
Repurchases of common
stock.................. -- -- (27) -- -- -- -- --
Issuance of common stock
for notes receivable... -- -- 38 61 -- -- (61) --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 302 302
Conversion of debt into
common stock........... -- -- 27 550 -- -- -- 550
Exercise of common stock
options................ -- -- 1,445 1,183 -- -- -- 1,183
</TABLE>
63
<PAGE>
INFOSEEK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Receivable Total
----------------- --------------- Accumulated Deferred From Shareholders'
Shares Amount Shares Amount Deficit Compensation Shareholders Equity
------- --------- ------ -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
through employee stock
purchase plan.......... -- $ -- 44 $ 295 $ -- $ -- $ -- $ 295
Issuance of common stock
from exercise of
warrants............... -- -- 91 -- -- -- -- --
Net loss and
comprehensive net
loss................... -- -- -- -- (26,562) -- -- (26,562)
------- --------- ------ -------- -------- -------- ----- --------
Balance at December 31,
1997................... -- -- 27,534 76,000 (48,030) (753) (211) 27,006
Unearned compensation
related to stock
options................ -- -- -- 352 -- (352) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 314 -- 314
Reversal of unearned
compensation........... -- -- -- (74) -- 74 -- --
Payment on shareholders'
notes receivable....... -- -- -- -- -- -- 77 77
Exercise of common stock
options................ -- -- 480 1,520 -- -- -- 1,520
Issuance of common stock
through employee stock
purchase plan.......... -- -- 44 479 -- -- -- 479
Issuance of common stock
in connection with
follow-on public
offering, net of
issuance costs......... -- -- 3,450 43,015 -- -- -- 43,015
Net loss and
comprehensive net
loss................... -- -- -- -- (5,694) -- -- (5,694)
------- --------- ------ -------- -------- -------- ----- --------
Balance at October 3,
1998................... -- $ -- 31,508 $121,292 $(53,724) $ (717) $(134) $ 66,717
======= ========= ====== ======== ======== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization--Infoseek Corporation, (the "Company"), provides leading
Internet search and navigation technology, products and services that use the
World Wide Web to empower users to make their lives easier. Infoseek is able
to segment users by interest area, providing advertisers with focused and
targeted audiences. The Infoseek Service is a comprehensive Internet gateway
that combines search and navigation with directories of relevant information
sources and content sites, offers chat and instant messaging for communicating
shared interest and facilitates the purchase of related goods and services.
The Company conducts its business predominantly within one industry segment.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated. As more fully
described in Note 2, a wholly owned subsidiary of the Company merged with
WebChat Communications, Inc. ("WebChat") in April 1998 in a pooling of
interests transaction. The consolidated financial statements for 1997 have
been restated to include the financial position, results of operations and
cash flows of WebChat. The basic and diluted net loss per share impact of
restating prior periods in connection with the WebChat acquisition was a $0.07
increase in basic and diluted net loss per share for the year ended December
31, 1997, and a $0.05 increase in basic and diluted net loss per share for the
nine months ended September 30, 1997. Prior to 1997, these amounts for WebChat
were not significant compared to those of the Company and accordingly, the
Company's previously issued financial statements were not restated. An
adjustment was made to the beginning 1997 common stock and accumulated deficit
as a result of not restating the Company's financial statements prior to 1997.
In January 1999, the Company changed from a calendar year ended December 31
to a fiscal year with 52- or 53-week periods ending on the Saturday nearest
September 30. The Company's financial statements have been presented to
reflect this change. The results of operations and cash flows of the Company
for the nine months ended October 3, 1998 contained 276 days and compares to
273 days for the unaudited results of operations and cash flows for the nine
months ended September 30, 1997.
Unaudited Interim Financial Information--The accompanying consolidated
financial statements for the nine month period ended September 30, 1997 are
unaudited but include all adjustments (consisting of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the operating results and cash flows for the period presented.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments which are purchased with a maturity of three months or less to be
cash equivalents.
Short-Term Investments--The Company accounts for investments in accordance
with Financial Accounting Standards Board, Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company's
short-term investments, which consist primarily of commercial paper and
government agency notes with maturities of one year or less, are classified as
available-for-sale and are carried at amortized cost which approximates fair
market value. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization, as well as any interest on the securities, is included in
interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income and interest expense, respectively. The cost of securities sold is
based on the specific identification
65
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
method. The Company had no significant investments in equity securities at
October 3, 1998 and December 31, 1997.
Property and Equipment--Property and equipment are carried at cost less
accumulated depreciation. The Company depreciates property and equipment using
the straight-line method over the estimated useful lives of three to five
years. Leasehold improvements are amortized using the straight-line method
over the shorter of the life of the related asset or the term of the lease.
Research and Development--Research and development expenditures are
generally charged to operations as incurred. Financial Accounting Standards
Board, Statement No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires the capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. In the Company's case, capitalization would begin upon completion
of a working model as the Company does not prepare detail program designs as
part of the development process. As of October 3, 1998 and December 31, 1997,
capitalized costs of this nature were insignificant.
Stock-Based Compensation--The Company has elected to follow Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting of Stock Issued to
Employees" and related interpretations, in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under Financial Accounting Standards Board Statement No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, with the exception of certain options granted
during the nine months ended October 3, 1998 and September 30, 1997 and for
the years ended December 31, 1997 and 1996 as discussed in Note 8, no
compensation expense is recognized as the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant.
Long-Lived Assets--In 1995, the Financial Accounting Standards Board
released Statement No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS No. 121 has not had a significant impact on
the consolidated financial statements of the Company.
Revenue Recognition--The Company's advertising revenues are derived
principally from short-term advertising contracts in which the Company
guarantees a minimum number of impressions for a fixed fee. Advertising
revenues are recognized ratably over the term of the contract provided that
the monthly minimum impressions are met, the Company does not have any
remaining significant obligations, and collection of the resulting receivable
is probable. To the extent the minimum guaranteed impressions are not met, the
Company defers recognition of the revenue until guaranteed impressions levels
are met.
Also included in advertising revenues is the exchange by the Company of
advertising space on the Company's Web sites for reciprocal advertising space
in other media publications or other Web sites or receipt of applicable goods
and services. Revenues from these exchange transactions are recorded as
advertising revenue at the estimated fair value of the goods and services
received and are recognized when both the Company's advertisements and the
reciprocal advertisements are run, or goods or services are received.
Advertising revenues recognized under these trading activities were less than
10% of total revenues for all periods presented.
66
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INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
In late 1997, the Company released a new version of its service which now
features 18 channels, and provides opportunities for revenue from the sale of
channel sponsorships, as well as to enable the Company to share in a portion
of the revenue generated by its users with these channel sponsors. Revenue
generated by channel sponsors is included in advertising revenues and is
generally recognized on a straight line basis over the term of the agreements
provided that minimum impressions are met.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP
97-2"), which superseded Statement of Position 91-1, "Software Revenue
Recognition", and provides guidance on generally accepted accounting
principles for recognizing revenue on software transactions.
SOP 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, post
contract customer support, installation, or training. Under SOP 97-2, the
determination of fair value is based on objective evidence which is specific
to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered. SOP 97-2 was amended in February 1998 by Statement
of Position 98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision
of SOP 97-2", which deferred for one year the specification of what was
considered vendor specific objective evidence of fair value for the various
elements in a multiple element arrangement. The Company has adopted the
provisions of these SOPs as of January 1, 1998.
The Company recognizes revenue allocable to software licenses and specified
upgrades upon delivery of the software product or upgrade to the end user,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond
twelve months and other arrangements with payment terms longer than normal not
to be fixed or determinable. If the fee is not fixed or determinable, revenue
is recognized as payments become due from the customer.
Postcontract customer support ("PCS") includes telephone support, bug fixes,
and rights to upgrades on a when-and-if-available basis. In software
arrangements that include rights to multiple software products, specified
upgrades, PCS, and/or other services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of
each deliverable based on vendor-specific objective evidence. Revenue
allocable to PCS is recognized on a straight-line basis over the period PCS is
provided.
The Company derived revenues of $5,671,000 and $1,345,000 for the nine
months ended October 3, 1998 and September 30, 1997, respectively, and
$2,141,000 for the year ended December 31, 1997 from the licensing of its
Ultraseek technology and the sale of PCS.
During 1996, the Company also derived revenues of $144,000 from fees related
to a premium subscription service offered to business and professional users.
Revenues from this service were recognized over the period the services were
provided. During the third quarter of 1996, the Company discontinued this
service.
Advertising Costs--Advertising costs are expensed as incurred. Advertising
costs, which include service provider fees and reciprocal advertising amounted
to $17,697,000 and $10,104,000 for the nine months ended October 3, 1998 and
September 30, 1997, respectively, and were $15,104,000 and $8,523,000 for the
years ended December 31, 1997 and 1996, respectively. The Company does not
incur any significant direct response advertising costs.
67
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and trade receivables. The Company places
its cash equivalents and short-term investments with high-quality financial
institutions. Through October 3, 1998, the Company invested its excess cash in
commercial paper, government agency notes and money market funds. Through
October 3, 1998, the Company operates predominantly in one business segment
(see Note 13) and sells advertising to various companies across several
industries. The Company generally does not require collateral. The Company
maintains allowances for credit losses, and such losses have been within
management's expectations. For the nine months ended October 3, 1998 and
September 30, 1997 and for the year ended December 31, 1997, no customer
accounted for greater than 10% of total revenues. For the nine months ended
September 30, 1997 and for the year ended December 31, 1996, one customer (a
related party, see Note 12) accounted for 10% and 12% of total revenues,
respectively.
Net Loss Per Share--In 1997, the Financial Accounting Standards Board issued
Statement No. 128, ("SFAS No. 128") "Earnings Per Share". SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary and fully diluted
earnings per share, outstanding nonvested shares are not included in the
computations of basic and diluted earnings per share until the time-based
vesting restriction has lapsed. Basic earnings per share also excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. In addition, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 98, "Earnings Per Share" in February 1998. Staff
Accounting Bulletin No. 98 effected the treatment of certain stock and
warrants ("cheap stock") issued within a one-year period prior to an initial
public offering. Earnings per share amounts presented have been restated for
the nine months ended September 30, 1997 and for the years ended December 31,
1997 and 1996 to conform to the requirements of SFAS No. 128 and Staff
Accounting Bulletin No. 98.
Net loss per share information for 1997 has been adjusted on a retroactive
basis to give effect to the merger with WebChat (see Note 2), whereby each
share of WebChat was converted to 0.03 shares of Infoseek common stock. Share
information for 1996 has not been restated due to WebChat amounts being
insignificant.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.
Comprehensive Income--During 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income". SFAS No. 130 establishes rules for reporting and displaying
comprehensive income or comprehensive net loss. The Company's total
comprehensive net loss was the same as its net loss for the nine months ended
October 3, 1998 and September 30, 1997 and for the years ended December 31,
1997 and 1996.
Segment Information--During 1998, the Company adopted the Financial
Accounting Standards Board Statement No. 131 ("SFAS No. 131"), "Disclosures
About Segments of An Enterprise and Related Information". SFAS No. 131
requires the Company to use the "management approach" in disclosing segment
information. The Company conducts its business predominantly within one
industry segment for all periods
68
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
presented. Management assesses the Company's performance, measures the
Company's loss and assets on a single segment basis. The single segment
generates revenue predominantly from the United States for all periods
presented (see Note 13).
Impact of Recently Issued Accounting Standards--In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). FAS 133 provides a comprehensive and consistent standard for the
recognition and measurements of derivatives and hedging activities. FAS 133 is
effective for fiscal years beginning after June 15, 1999 and management
believes that the adoption of the Statement will not have a significant impact
on the financial position, operating results or cash flows of the Company.
Reclassifications--Certain reclassifications, none of which affected net
loss, have been made to prior year's amounts in order to conform to the
current year's presentation. Hosting, content and website costs represent the
Company's cost of goods sold.
2. Business Combination
On April 17, 1998, the Company acquired WebChat in a tax-free reorganization
in which a wholly owned subsidiary of the Company was merged directly into
WebChat. The Company has exchanged approximately 316,000 shares of Infoseek
Corporation common stock and has reserved approximately 11,000 shares for
WebChat options assumed by the Company. Each share exchanged represents 0.03
share of common stock of the Company for each share of the common, and
preferred stock of WebChat. Merger related expenses were not significant and
were recorded in the second quarter of 1998. The merger has been accounted for
under the pooling of interests method.
A reconciliation of revenues and net loss of the Company, as previously
reported, WebChat and combined for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Revenues Net loss
-------- --------
(In thousands)
<S> <C> <C>
Infoseek................................................... $34,603 $24,623
WebChat.................................................... 479 1,939
------- -------
Combined................................................... $35,082 $26,562
======= =======
</TABLE>
3. Fair Value of Financial Instruments
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
69
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
<TABLE>
<CAPTION>
At October 3, 1998
---------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Short-term investments
Commercial paper..................... $46,823 $-- $-- $46,823
Money market fund.................... 4,417 -- -- 4,417
------- ---- ---- -------
Total................................ $51,240 $-- $-- $51,240
======= ==== ==== =======
<CAPTION>
At December 31, 1997
---------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Short-term investments
Commercial paper..................... $23,007 $-- $-- $23,007
Government agency notes.............. 4,003 2 -- 4,005
Money market fund.................... 1,106 -- -- 1,106
------- ---- ---- -------
Total................................ $28,116 $ 2 $-- $28,118
======= ==== ==== =======
</TABLE>
Realized gains and losses were insignificant during the nine months ended
October 3, 1998 and September 30, 1997 and for the years ended December 31,
1997 and 1996.
4. Obligations
In March 1997, the Company entered into a four year, $5,000,000 equipment
term loan facility. The loan bears interest at the bank's prime rate plus
0.25% (8.75% at October 3, 1998 and December 31, 1997). Under the terms of the
agreement, the Company grants a security interest in certain assets of the
Company and must maintain financial covenants including minimum tangible net
worth and others based on monthly cash balances. Under the equipment term loan
facility, the Company is restricted in its ability to pay dividends. Interest-
only payments will be made during the first twelve months and borrowings and
interest will be repaid on a straight-line basis over 36 months beginning in
month thirteen of the facility. As of October 3, 1998 and December 31, 1997,
there was approximately $4,345,000 and $5,000,000 outstanding against the term
loan facility, respectively.
In February 1997, WebChat entered into a three and one half year $300,000
equipment term loan facility. The Company repaid the equipment term loan
during the nine months ended October 3, 1998 and no amount was outstanding
under the equipment term loan facility as of October 3, 1998. As of December
31, 1997, there was approximately $265,000 outstanding against the term loan
facility.
In 1996 and 1995, the Company entered into term loan agreements with a
lending institution under which the Company borrowed approximately $3,540,000
to finance the purchase of equipment. Borrowings made under the agreement are
due over 37 months, bear interest ranging from 15.80% to 16.39%, and are
secured by certain assets of the Company. As of October 3, 1998 and December
31, 1997, approximately $1,006,000 and $1,803,000 were outstanding against the
term loan agreements, respectively.
70
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
Maturities under these obligations are as follows:
<TABLE>
<CAPTION>
October 3, 1998
---------------
(In thousands)
<S> <C>
1999......................................................... $2,683
2000......................................................... 1,810
2001......................................................... 858
------
$5,351
======
</TABLE>
5. Commitments
The Company leases its facilities under operating lease agreements which
expire at various dates through 2006. Total rent expense for the nine months
ended October 3, 1998 and September 30, 1997 was $2,003,000 and $866,000,
respectively, and for the years ended December 31, 1997 and 1996, total rent
expense was $1,397,000 and $379,000, respectively. In January 1998, the
Company signed an agreement to sublease approximately 20,500 square feet of
its Sunnyvale, California facility. In connection with the sublease agreement,
the Company will receive future rent payments of approximately $393,000 in
1999. For the nine months ended October 3, 1998, the Company recorded sublease
rental income of $279,000.
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements is included in property and equipment and aggregated $704,000 at
October 3, 1998. Related accumulated amortization was $209,000 at October 3,
1998. Amortization expense related to assets under capital leases is included
in depreciation expense. In addition, the capital leases are secured by the
related equipment, and the Company is required to maintain liability and
property damage insurance.
Future minimum lease payments under noncancelable operating leases and
capital leases are as follows:
<TABLE>
<CAPTION>
October 3, 1998
-------------------------------
Operating Leases Capital Leases
---------------- --------------
(In thousands)
<S> <C> <C>
1999......................................... 2,735 269
2000......................................... 2,483 243
2001......................................... 2,059 105
2002......................................... 1,789 --
2003......................................... 282 --
------ ----
Total minimum payments....................... $9,348 617
======
Less amount representing interest............ (45)
----
572
Less current portion......................... (259)
----
$313
====
</TABLE>
71
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
Netscape
Historically, a large portion of the Company's traffic was derived through
the Web page of Netscape Communications Corporation ("Netscape"). In March
1996, the Company entered into an agreement with Netscape, which provided that
the Company would be listed as a Premier Provider on Netscape's Web page for
the period from April 10, 1996 to March 31, 1997. This agreement with Netscape
provided for payments of up to an aggregate of $5,000,000 in cash and
reciprocal advertising ($3,500,000 in cash and $1,500,000 in reciprocal
advertising) over the course of the one-year term of the agreement. In March
1997, Infoseek renewed its agreement with Netscape under terms that extended
the current contract through April 30, 1997 and thereafter provided for
Infoseek to be one of four premier providers displayed on Netscape's Web page
for the period of May 1, 1997 through April 30, 1998. The renewed agreement
with Netscape provided for payments of up to an aggregate of $12,500,000 in
cash and reciprocal advertising ($10,000,000 in cash and $2,500,000 in
reciprocal advertising) over the term of the agreement.
As of June 1, 1998, the Company had entered into an one-year agreement with
Netscape with terms that provide for the Company to pay, based on impressions
delivered, up to an aggregate of $12,500,000 in cash to be one of the six non-
exclusive premier providers of navigational services (along with Excite,
Netscape, Lycos, Alta Vista, and LookSmart). Under the terms of the agreement,
the Company will receive 15% of premiere provider rotations--the pages served
to visitors who have not selected a preferred provider. The payments to
Netscape are being recognized ratably over the term of the agreement. The
Company and Netscape subsequently renegotiated the agreement (see Note 15).
During the nine months ended October 3, 1998 and September 30, 1997, the
Company recognized $6,595,000 and $5,416,000, respectively, of expense related
to this agreement and for the years ended December 31, 1997 and 1996, the
Company recognized $9,583,000 and $3,750,000, respectively, of expense related
to this agreement. The costs of the Netscape agreement are being recognized
ratably over the term of the agreement. As of October 3, 1998, the Company has
a cash commitment ranging from a minimum of $4,150,000 to a maximum of
$12,500,000 depending on the level of traffic delivered by Netscape in
connection with this agreement. At December 31, 1997, the Company had
$7,555,000 of cash commitment remaining in connection with the agreement. At
October 3, 1998 and December 31, 1997, $1,558,000 and $4,221,000 are included
in accrued liabilities to service providers, respectively.
In July 1997, the Company entered into an one-year agreement with Netscape
whereby it was designated as a premier provider of international search and
navigational guide services for the Netscape Net Search Program. Under the
terms of the agreement, the Company will provide services for 10 Netscape
local Web sites. The Company's agreement with Netscape provides for payments
ranging from a minimum of $666,000 ($400,000 in cash and $266,000 in
reciprocal advertising) to a maximum of $1,219,000 ($677,000 in cash and
$542,000 in reciprocal advertising) depending on the level of traffic
delivered by Netscape. For the nine months ended October 3, 1998 and September
30, 1997, the Company incurred sales and marketing expenses of approximately
$506,000 and $100,000 under this agreement, respectively. During the year
ended December 31, 1997, Netscape delivered traffic at the minimum level and
as a result the Company recognized sales and marketing expenses of
approximately $333,000 under this agreement. As of October 3, 1998, the
Company had a cash commitment of $248,000. At December 31, 1997, the Company
had a cash commitment ranging from a minimum of $74,000 to a maximum of
$351,000 depending on the level of traffic delivered by Netscape in connection
with this agreement. This agreement originally expired on June 30, 1998, but
was subsequently extended to September 30, 1998 under similar terms.
72
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
Microsoft and WebTV Networks
The Company also had an agreement with Microsoft Corporation ("Microsoft")
to provide navigational services on certain Microsoft web sites through which
the Company also receives traffic. In exchange for such traffic, the Company
made available to Microsoft advertising space on the Infoseek service free of
charge. Effective October 1, 1998, the Company terminated the agreement and
entered into a new agreement with Microsoft to become one of five premier
providers of search and navigation services on Microsoft's network of Internet
products and services. Under the terms of the new twelve month Microsoft
agreement, the Company is obligated to pay an aggregate of $10,675,000 for a
guaranteed minimum number of impressions on both Microsoft's Internet Explorer
search feature and Microsoft's website. The Company will also pay, based on
the number of impressions delivered, for additional impressions on both
Internet Explorer and Microsoft's website, up to a maximum of $18,000,000. The
accounting treatment for the Microsoft agreement will result in amortizing the
obligation over the one-year term of the agreement, beginning in the quarter
ended January 2, 1999 which is the quarter that the service is launched. In
connection with the agreement, the Company made a prepayment of $5,338,000 as
of October 3, 1998, which is included in prepaid to service providers.
In addition, the Company entered into an agreement with WebTV Networks, Inc.
("WebTV") pursuant to which the Company will be the exclusive provider of
search and directory services to WebTV. Under this two year agreement, the
Company is responsible for managing advertising sales for all of WebTV's
search traffic and the substantial majority of WebTV's current non-search
traffic. Pursuant to the agreement which was effective on August 28, 1998, the
Company is obligated to make cash payments to WebTV totaling $26,000,000, with
$15,000,000 of such amount being payable in advance for the first five
quarters upon mutual acceptance of the technology by both parties. In October
1998, the Company and WebTV mutually accepted the technology pursuant to the
agreement and, accordingly, $15,000,000 was recorded in prepaid to service
providers of which $500,000 has been paid in cash and $14,500,000 is included
in accrued liabilities to service providers at October 3, 1998. The remaining
$11,000,000 is being paid ratably over the last three quarters of the
agreement term. Such payments by the Company are subject to reimbursement
depending on the number of impressions delivered over the life of the
agreement. The Company is to receive all of the revenue generated from such
advertising sales up to a pre-determined amount that is in excess of the
Company's total payment obligations to WebTV under the agreement, with
allocations of such revenue between the Company and WebTV being made beyond
this pre-determined amount.
Contingencies
From time to time, the Company may be a party to litigation and claims
incident to the ordinary course of its business. Although the results of
litigation and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a material adverse effect
on the Company's financial position, results of operations, or cash flows.
6. Restructuring and Other Charges
During the second quarter of 1997, the Company recorded restructuring and
other charges of approximately $7,400,000, of which approximately $6,200,000
related to a program to discontinue certain business arrangements, which were
determined to be non-strategic, and approximately $1,200,000 related to
management changes. Of these restructuring charges, approximately $5,000,000
involved cash outflows, all of which had been completed as of October 3, 1998.
Non-cash restructuring charges of approximately $2,400,000 related primarily
to the write-down of certain non-strategic business assets. There were no
material changes to the restructuring plan or in the estimates of the
restructuring costs. As of October 3, 1998, the Company had fully utilized its
restructuring reserve.
73
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
7. Shareholders' Equity
Preferred Stock--On May 15, 1996, the Board of Directors authorized
5,000,000 shares of undesignated preferred stock. In connection with this
action, the Board has the authority to issue in one or more series and to fix
the rights, preferences, privileges, and restrictions thereof, without further
vote or action by the shareholders. No such shares have been issued to date.
Convertible Preferred Stock--Through May of 1996, the Company issued series
A, B, C, and E convertible preferred stock. A portion of the Series E
convertible preferred stock was redeemable at the request of the holder. On
June 11, 1996 the Company completed its initial public offering and at that
time all outstanding shares of convertible preferred stock were converted into
common stock on a one-for-one basis.
Common Stock--On May 15, 1996, the Company's Shareholders approved a 3-for-4
reverse stock split of the Company's preferred and common stock. All
outstanding preferred, common and common equivalent shares in the accompanying
financial statements have been retroactively adjusted to give effect to this
reverse stock split. At the same time, the Board of Directors approved the
increase of authorized common stock to 60,000,000 shares.
Founders' Common Stock--The Company has the right, at any time within sixty
days after termination of a founder's employment or service, to repurchase
certain common shares at the price per share paid by the founder. The
Company's right to repurchase lapses with respect to 25% of the total number
of shares held by the founder, commencing twelve months after purchase, and in
monthly increments of 2.08% of the total number of shares thereafter. There
were no founders' common shares subject to repurchase as of October 3, 1998
and at December 31, 1997 there were 7,000 founders' common shares subject to
repurchase.
Notes Receivable from Shareholders--During 1997 and 1996, the Company
entered into agreements with certain officers and employees to sell
approximately 38,000 and 412,000 shares, respectively, of the Company's common
stock in exchange for full recourse promissory notes. The shares are subject
to repurchase by the Company, and such repurchase options lapse in monthly
increments of 2.08% of the total number of shares purchased. At October 3,
1998 and December 31, 1997, there were approximately 53,000 and 88,500 common
shares, respectively, subject to repurchase by the Company.
Follow-On Public Offering--In February 1998, the Company completed a follow-
on public offering of 3,450,000 shares of Common Stock and received proceeds
of approximately $43,015,000 net of underwriting discounts, commissions and
other offering costs.
Common Stock Reserved For Future Issuance--Shares of common stock reserved
for future issuance are as follows:
<TABLE>
<CAPTION>
October 3, 1998
---------------
(In thousands)
<S> <C>
Stock option plan............................................ 6,773
Employee stock purchase plan................................. 499
-----
7,272
=====
</TABLE>
74
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
8. Stock Option/Stock Issuance Plan
The Company's Stock Option Plan (the "Predecessor Plan") provides for the
grant of incentive stock options and non statutory stock options to employees
and consultants of the Company at prices ranging from 85% to 110% (depending
on the type of grant) of the fair market value of the common stock on the date
of grant as determined by the Board of Directors.
In April 1996, the Board of Directors adopted the 1996 Stock Option/Stock
Issuance Plan (the "1996 Plan") which was approved by the Company's
shareholders on May 15, 1996. The 1996 Plan is intended to serve as the
successor equity incentive stock issuance program to the Predecessor Plan.
Under the 1996 Plan, 7,225,000 shares of common stock have been authorized for
issuance. In June 1998, the Company's shareholders ratified and approved to
increase the number of shares available for grant by 1,500,000 to a total of
8,725,000 for the 1996 Stock Option/Stock Issuance Plan. The 1996 Plan is
divided into three separate components: the Discretionary Option Grant Program
under which eligible individuals may be granted options to purchase shares of
common stock at an exercise price of not less than 85% of their fair market
value on the grant date; the Stock Issuance Program under which eligible
individuals may be issued shares of common stock directly through the purchase
of such shares at a price of not less than 85% of their fair market value at
the time of issuance or as a bonus tied to the performance of services; and
the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non employee Board
members to purchase shares of common stock at an exercise price equal to 100%
of their fair market value on the grant date. The vesting and exercise
provisions of the option grants are determined by the Board of Directors.
Options generally vest and become exercisable as to 25% of the shares one year
from the date of grant and the balance in monthly increments over the
subsequent three years of service. Options expire no later than ten years from
the date of grant.
In conjunction with the acquisition of WebChat in April 1998 (see Note 2),
the Company also reserved approximately 11,000 shares for option grants under
the WebChat Communications, Inc. 1996 Stock Option Plan. The plan is
administered by the Company's Board of Directors and provides for incentive
stock options or nonqualified stock options to be issued to employees or
consultants of the Company. Prices for incentive stock options may not be less
than the fair value of the common stock at the date of grant. Prices for
nonqualified stock options may not be less than 85% of the fair value of the
common stock at the date of grant. Options become exercisable and vest over a
period of at least five years from the date of grant. Unexercised options
expire ten years after the date of grant.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. The Company, under APB No. 25, generally does not recognize
compensation expense as the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
Through October 3, 1998 and December 31, 1997, the Company recorded
aggregate deferred compensation of $6,018,000 and $5,666,000, respectively,
representing the difference between the grant price and the deemed fair value
of the Company's common stock granted during those periods. The amortization
of deferred compensation is being charged to operations and is being amortized
over the vesting period of the options, which is typically four years. For the
nine months ended October 3, 1998 and September 30, 1997, amortized expenses
were $314,000 and $717,000, respectively, and for the years ended December 31,
1997 and 1996, the amortized expenses were $832,000 and $1,346,000,
respectively.
75
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of this statement. For options
granted during the nine months ended October 3, 1998, the fair value was
estimated at the date of grant using the Black-Scholes single option pricing
model with the following weighted average assumptions: weighted-average risk
free interest rate of 5.36%; a dividend yield of 0.0%; a volatility factor of
the expected market price of the Company's common stock of .99; and a
weighted-average expected life of the option of five years. The fair value for
options granted during 1997 was estimated at the date of grant using the
Black-Scholes multiple option pricing model with the following weighted
average assumptions: risk-free interest rate ranging from 5.53% to 6.77%; a
dividend yield of 0.0%; a volatility factor of the expected market price of
the Company's common stock of .87; and a weighted-average expected life of the
option of five years for officers and four years for non officers. Subsequent
to the Company's initial public offering in June 1996, the fair value of
options granted during the balance of 1996 were estimated with the following
weighted average assumptions: risk-free interest rates ranging from 5.18% to
6.58% in 1996; a dividend yield of 0.0%; a volatility factor of the expected
market price of the Company's common stock of .80; and a weighted-average
expected life of the option of five years for officers and four years for non
officers. The fair value for options granted prior to the Company's initial
public offering in June 1996 were estimated at the date of grant using the
minimum value method and have a volatility factor of zero.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended December 31,
October 3, --------------------------
1998 1997 1996
----------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Pro forma net loss................. $(12,345) $ (30,919) $ (17,328)
Pro forma basic and diluted net
loss per share.................... $ (0.40) $ (1.16) $ (0.78)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
fiscal 2000.
In July 1997, the Board of Directors authorized the repricing of options to
purchase 821,300 shares of common stock effective on July 23, 1997 to the then
fair market value of $6.13 per share. Under the terms of the repricing, the
repriced options maintain the same vesting and expiration terms, except they
may not be exercised until January 9, 1998. Executive officers, consultants
and members of the Board of Directors were not eligible to participate in the
repricing.
76
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
A summary of the Company's stock option activity and related information for
the nine months ended October 3, 1998 and the years ended December 31, 1997
and 1996 are as follows (as described in Note 2, amounts used in 1997 have
been restated to reflect the April 17, 1998 merger with WebChat):
<TABLE>
<CAPTION>
October 3, December 31, December 31,
1998 1997 1996
------------------------ ------------------------- ------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
(In thousands, except weighted average exercise price and per share data)
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of
period................. 4,158 $ 4.92 4,921 $2.10 3,074 $0.13
Granted................. 2,451 $20.41 4,418 $6.61 2,851 $3.98
Exercised............... (480) $ 3.17 (1,456) $0.79 (54) $0.11
Canceled................ (337) $13.81 (3,725) $4.79 (957) $1.51
----- ------ -----
Outstanding -- end of
period................. 5,792 $11.12 4,158 $4.92 4,914 $2.10
===== ====== =====
Exercisable at end of
period................. 1,171 $ 3.99 583 $2.63 845 $0.35
Weighted average fair
value of options
granted during the
period................. $15.63 $4.48 $3.79
</TABLE>
Outstanding and Exercisable By Price Range as of October 3, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- --------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
as of Remaining Average as of Average
Range of October 3, Contractual Exercise October 3, Exercise
Exercise Prices 1998 Life Price 1998 Price
--------------- -------------- ----------- -------- ----------- --------
(In thousands) (Years) (In thousands)
<S> <C> <C> <C> <C> <C>
$0.00--$5.00.......... 2,374 7.56 $ 3.83 918 $3.27
$5.01--$12.50......... 1,268 8.41 $ 8.41 253 $6.60
$12.51--$25.00........ 1,904 9.62 $19.35 -- --
$25.01--$37.00........ 246 9.68 $31.70 -- --
----- ---- ------ ----- -----
5,792 8.51 $11.12 1,171 $3.99
===== ==== ====== ===== =====
</TABLE>
9. Employee Stock Purchase Plan
In April 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan (the "Purchase Plan"), which is designed to allow eligible
employees of the Company to purchase shares of common stock at semiannual
intervals through their periodic payroll deductions. An aggregate of 187,500
shares of common stock were originally reserved for the Purchase Plan. In June
1998, the Company's shareholders increased the number of shares reserved by
400,000 to a total of 587,500, of which 88,866 had been issued through
October 3, 1998. The Purchase Plan is implemented in a series of successive
offering periods, each with a maximum duration of 24 months. Eligible
employees can have up to 10% (up to a maximum of 1,000 shares per year) of
their base salary deducted that is to be used to purchase shares of the common
stock on specific dates determined by the Board of Directors. The price of
common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
each offering period or the specified purchase date. The Company does not
recognize compensation cost related to employee purchase rights
77
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
under the Plan. To comply with the pro forma reporting requirements of SFAS
No. 123, compensation cost is estimated for the fair value of the employees'
purchase rights using the Black-Scholes model with the following assumptions
for those rights granted in 1998: a risk free interest rate of 5.36%; dividend
yield of 0.0%; expected volatility factor of .99; an expected life of six
months; for those granted in 1997: a risk free interest rate of 6.0%; dividend
yield of 0.0%; expected volatility factor of .87; an expected life of six
months; and for those granted in 1996: a risk free interest rate of 5.0%;
dividend yield of 0.0%; expected volatility factor of .80; an expected life of
six months. The weighted average estimated fair value of the Purchase Plan
shares granted in 1998 was $5.42.
10. Income Taxes
Due to the Company's loss position, there was no provision for income taxes
for any period presented.
As of October 3, 1998, the Company has federal and state net operating loss
carryforwards of approximately $40,000,000 and $17,000,000, respectively. The
federal net operating loss carryforwards will expire in the years 2009 through
2013, and the state net operating loss carryforwards will expire in the years
1999 through 2013. The Company has federal and state research and
experimentation credits of approximately $880,000 and $780,000, respectively,
that will expire in the years 1999 through 2013. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets consisted of the following at:
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
---------- ------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating losses............................... $ 15,046 $ 17,448
Research credit carryforwards...................... 925 406
Other individually insignificant items............. 5,604 1,691
-------- --------
Total deferred tax assets........................ 21,575 19,545
Valuation allowance................................ (21,575) (19,545)
-------- --------
Total net deferred tax assets.................... $ -- $ --
======== ========
</TABLE>
The change in the valuation allowance was a net increase of approximately
$2,030,000, $10,545,000 and $6,409,000 for the nine months ended October 3,
1998 and for the years ended December 31, 1997 and 1996, respectively.
11. Employee Benefit Plan
In January 1996, the Company adopted a plan to provide retirement and
incidental benefits for its eligible employees, known as the Infoseek
Corporation 401(k) Plan ("The Plan"). As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Participants in the Plan may make salary deferrals of up
to 20% of their annual salary, limited by the maximum dollar amount allowed by
the Internal Revenue Code. The Company, at its discretion, may elect to make
contributions to the Plan on behalf of its eligible participants. The Company
has made no such contributions to date.
78
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
12. Related Party Transactions
Bell Atlantic, with a representative on the Company's Board of Directors, is
considered a related party. In March 1996, the Company and Bell Atlantic
entered into a one-year agreement, which provided for the Company's display of
the Big Yellow logo within the Infoseek Service. According to the terms of the
agreement, Bell Atlantic agreed to pay to the Company up to an aggregate of
$4,600,000, in monthly payments, which amount would be decreased
proportionately if the number of impressions of the Big Yellow logo were below
a specified number. In February 1997, the Company signed an amendment with
Bell Atlantic extending the term of the original agreement, dated March 1996,
through June 1998 in exchange for an additional $1,400,000, for a total of
$6,000,000, in monthly payments. The terms and conditions of the amended
agreement were substantially the same, except for elimination of certain
exclusivity and reimbursement provisions. The Company recognized revenue of
$1,298,000 and $2,116,000 for the nine months ended October 3, 1998 and
September 30, 1997, respectively, and $2,820,000 and $1,882,000 in connection
with this agreement for the years ended December 31, 1997 and 1996,
respectively. Amounts receivable from and payable to such related party were
insignificant at October 3, 1998 and December 31, 1997.
13. Segment Information
The Company predominantly operates in one business segment--providing
Internet search and navigation products and services for which the Company
receives advertising revenues from its customers. Advertising revenues totaled
$45,044,000, $21,062,000, $32,941,000, and $14,951,000 for the nine months
ended October 3, 1998 and September 30, 1997 and for the years ended December
31, 1997 and 1996, respectively. During the nine months ended October 3, 1998,
approximately 11% of the Company's total revenues related to the sale of its
Ultraseek software licenses and support. Software licensing revenues amounted
to less than 10% of total revenues for the nine months ended September 30,
1997 and the years ended December 31, 1997 and 1996. With the acquisition of
Starwave Corporation (see Note 15), software licensing revenues are expected
to fall below 10% of total revenues during fiscal 1999 and on a go forward
basis.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about asset allocation, expense allocation, or
profitability from the Company's Internet search navigation products and
services or from its Ultraseek software licenses and support.
Total revenues generated from U.S. customers totaled $49,990,000,
$22,319,000, $34,777,000 and $15,095,000 of total revenues for the nine months
ended October 3, 1998 and September 30, 1997, and for the years ended December
31, 1997 and 1996, respectively. Total revenues generated from foreign
customers totaled $725,000, $88,000 and $305,000, respectively, of total
revenues for the nine months ended October 3, 1998 and September 30, 1997, and
for the year ended December 31, 1997, respectively (none for the year ended
December 31, 1996). For the nine months ended September 30, 1997 and for the
year ended December 31, 1996, revenues from Bell Atlantic amounted to
approximately 10% and 12% of total revenues, respectively (see Note
12).
79
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
14. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended
Nine Months Ended December 31,
------------------------ ------------------
October 3, September 30,
1998 1997 1997 1996
---------- ------------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss....................... $(5,694) $(21,914) $(26,562) $(15,938)
------- -------- -------- --------
Numerator for basic and diluted
net loss per share............ $(5,694) $(21,914) $(26,562) $(15,938)
======= ======== ======== ========
Weighted average of common
shares........................ 30,512 26,270 26,627 14,076
Conversion of preferred stock
not included in shares related
to SEC Staff Accounting
Bulletin 98................... -- -- -- 8,044
------- -------- -------- --------
Denominator for basic and di-
luted net loss per share...... 30,512 26,270 26,627 22,120
======= ======== ======== ========
Basic and diluted net loss per
share......................... $ (0.19) $ (0.83) $ (1.00) $ (0.72)
======= ======== ======== ========
</TABLE>
15. Subsequent Events (Unaudited)
On July 24, 1998, the Company entered into an agreement to acquire Quando,
Inc. ("Quando") for approximately $17,000,000, subject to adjustment, in
shares of the Company's common stock. On January 15, 1999, the Company
completed its acquisition of Quando in a tax-free reorganization in which a
wholly-owned subsidiary of Infoseek was merged directly into Quando for
396,591 shares of Infoseek Common Stock. The Company also reserved
approximately 26,000 shares of Infoseek Common Stock for Quando options
assumed by the Company. The acquisition of Quando was accounted for using the
purchase method of accounting. Infoseek incurred direct costs of $1,500,000 as
a result of its acquisition of Quando which will be accounted for as part of
the purchase price of the transaction.
Based upon the fair value of Quando and the preliminary allocation of the
consideration paid for the assets and liabilities of Quando, the Company
recorded approximately $17,715,000 in goodwill, developed technology and
assembled workforce intangibles which will be amortized on a straight-line
basis over a two year period. In addition, the Company incurred write-offs
related to in-process research and development of approximately $4,300,000.
On November 9, 1998, the Company renewed the international agreement with
Netscape for which the Company will be one of the non-exclusive premier
providers for search and directory services in seven foreign sites for the
period of October 1, 1998 to September 30, 1999. Under the terms of the
renewed agreement, the Company will pay Netscape a one-time $120,000
nonrecurring engineering fee with additional quarterly payments being made
based upon established rates for impressions delivered by Netscape. The
agreement may be terminated by either party upon sixty days prior written
notice to the other party.
On November 11, 1998, the Company received notice from Netscape of their
intent to either terminate the contract or negotiate a new agreement to afford
Infoseek with different positioning or a lower rotation percentage on the
Netscape site on pricing terms to be mutually agreed. On November 25, 1998,
the Company and Netscape renegotiated the terms of the June 1998 agreement to
provide for the purchase of 5% of Netscape's available
80
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
search traffic beginning January 11, 1999 and through the duration of the
agreement which terminates May 31, 1999. Under the new agreement, the Company
is charged a higher rate for certain traffic received. The maximum payment cap
is $12,500,000, less any payments made under the prior agreement.
On November 18, 1998, the Company completed its acquisition of Starwave
Corporation ("Starwave"), a subsidiary of The Walt Disney Company ("Disney")
whereby the Company issued 25,932,681 shares of common stock in exchange for
all outstanding Starwave shares. The Company also reserved 2,205,316 shares of
common stock in connection with outstanding stock options of Starwave to be
assumed by the Company. The fair value of the Company's shares and options
issued was approximately $897,800,000.
A new holding company structure was established as a result of the
acquisition. Starwave and Infoseek Corporation, a California corporation,
became wholly-owned subsidiaries of the Infoseek Corporation, a Delaware
corporation, (the "Holding Company") which is a registered public company
incorporated in Delaware. The authorized capital stock of the Holding Company
consists of 500,000,000 shares of $0.001 par value common stock and 25,000,000
shares of $0.001 par value Preferred Stock. Disney also purchased an
additional 2,642,000 unregistered shares of the Holding Company's common stock
and a warrant, subject to vesting, to purchase an additional 15,720,000
unregistered shares of the Holding Company's common stock (the "Warrant") in
exchange for approximately $70,000,000 in cash and a $139,000,000 five-year
promissory note. The Warrant generally enables Disney to achieve a majority
stake in the Company over a three year period.
Infoseek expects to incur increased operating expenditures associated with
its expanded operations resulting from the transaction, as well as the
development, launch and promotion of GO Network. In this regard, Infoseek has
agreed to use commercially reasonable efforts to meet certain spending
requirements for GO Network pursuant to the terms of a license agreement
between Infoseek and Disney related to GO Network. Subject to adjustment by
unanimous vote of the two member advisory committee established pursuant to a
product management agreement between Infoseek and Disney, these spending
requirements for GO Network for the first three years are $40,500,000,
$58,300,000 and $64,800,000, respectively. In addition, pursuant to a
promotional services agreement (the "Promotional Services Agreement"),
Infoseek has agreed to purchase approximately $165,000,000 in promotional
services over a five-year period for GO Network. The amounts spent on the
purchase of promotional services under the promotional services agreement
apply towards the spending requirements under the license agreement.
In addition, under a license agreement entered into by and between Disney
and Infoseek, Disney has agreed to grant to Infoseek a worldwide license to
exploit the trademarks and Web addresses associated with GO Network and
Infoseek has agreed to pay Disney royalties. Royalties are calculated as one
percent (1%) of Infoseek's revenues other than revenues derived from software
sales and services. Royalties under the license agreement will not be earned
nor paid until the end of any Infoseek fiscal year in which Infoseek has
positive earnings before interest, taxes, and amortization ("EBITA") as
defined and royalty payments in any year will not exceed 15% of EBITA in such
year as defined.
Disney also has certain contractual rights to maintain its initial
percentage stock and warrant ownership through direct purchases from the
Company in the event of dilutive issuances. The Company may be required to
sell to Disney certain shares of common stock and issue warrants at prices
below fair market value at the time of purchase which may result in future
material charges adversely affecting the Company's results of operations.
The Company expects to incur approximately $22,000,000 in acquisition costs
which will be included in the purchase price of Starwave. As of October 3,
1998, the Company had incurred approximately $2,800,000 of
81
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
these direct acquisition costs. The Company is accounting for the Starwave
acquisition under the purchase method of accounting. In the quarter ended
January 2, 1999, the Company recorded approximately $658,500,000 in goodwill
and joint venture relationships which will be amortized on a straight-line
basis over a ten year period. Also, the Company recorded approximately
$45,200,000 for developed technology and assembled workforce which will be
amortized on a straight-line basis over a two-year period. In addition, the
Company incurred write-offs related to in-process research and development in
the amount of $72,600,000.
In conjunction with the acquisitions of Starwave and Quando, the Company
expects to incur $7,500,000 of integration costs, of which $1,400,000 was
included in the results of operations for the nine months ended October 3,
1998. The remaining $6,100,000 will be included in the Company's future
operations.
16. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
March 31, June 30, October 3,
1998 1998 1998
----------- ---------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues................. $ 14,453 $ 17,066 $ 19,196
Costs and expenses:
Hosting, content and website
costs....................... 2,154 2,524 3,278
Research and development..... 2,130 2,667 2,635
Sales and marketing.......... 10,577 11,863 12,704
General and administrative... 1,862 2,061 3,953
---------- ---------- ----------
Total costs and expenses... 16,723 19,115 22,570
---------- ---------- ----------
Operating loss................. (2,270) (2,049) (3,374)
Net interest income............ 470 782 747
---------- ---------- ----------
Net loss....................... $ (1,800) $ (1,267) $ (2,627)
========== ========== ==========
Basic and diluted net loss per
share......................... $ (0.06) $ (0.04) $ (0.08)
========== ========== ==========
</TABLE>
82
<PAGE>
INFOSEEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information pertaining to the nine month
period ended September 30, 1997 is unaudited)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues................. $ 6,240 $ 7,786 $ 8,381 $12,675
Costs and expenses:
Hosting, content and website
costs....................... 1,297 1,533 1,567 1,922
Research and development..... 1,728 2,374 1,777 2,021
Sales and marketing.......... 6,650 7,541 8,329 11,800
General and administrative... 1,470 1,825 1,947 1,800
Restructuring and other
charges..................... -- 7,349 -- --
------- -------- ------- -------
Total costs and expenses... 11,145 20,622 13,620 17,543
------- -------- ------- -------
Operating loss................. (4,905) (12,836) (5,239) (4,868)
Net interest income............ 400 379 287 220
------- -------- ------- -------
Net loss....................... $(4,505) $(12,457) $(4,952) $(4,648)
======= ======== ======= =======
Basic and diluted net loss per
share......................... $ (0.17) $ (0.47) $ (0.19) $ (0.17)
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues................. $ 1,731 $ 3,286 $ 4,007 $ 6,071
Costs and expenses:
Hosting, content and website
costs....................... 690 729 827 948
Research and development..... 934 950 1,218 1,448
Sales and marketing.......... 2,757 5,566 5,219 6,913
General and administrative... 860 919 1,091 1,307
------- ------- ------- -------
Total costs and expenses... 5,241 8,164 8,355 10,616
------- ------- ------- -------
Operating loss................. (3,510) (4,878) (4,348) (4,545)
Net interest income (expense).. (58) 155 652 594
------- ------- ------- -------
Net loss....................... $(3,568) $(4,723) $(3,696) $(3,951)
======= ======= ======= =======
Basic and diluted net loss per
share......................... $ (0.18) $ (0.25) $ (0.15) $ (0.16)
======= ======= ======= =======
</TABLE>
The 1997 quarterly amounts have been restated to reflect the April 17, 1998
merger with WebChat. The 1996 quarterly amounts have not been restated due to
WebChat amounts being insignificant.
83
<PAGE>
STARWAVE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP....................................... 85
Report of KPMG LLP......................................................... 86
Consolidated Balance Sheets as of October 4, 1998, September 28, 1997 and
December 31, 1996......................................................... 87
Consolidated Statements of Operations for the Year Ended October 4, 1998,
Nine months Ended September 28, 1997 and Year Ended December 31, 1996 .... 88
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the Year Ended October 4, 1998, Nine months Ended September 28, 1997 and
the Year Ended December 31, 1996.......................................... 89
Consolidated Statements of Cash Flows for the Year Ended October 4, 1998,
Nine months Ended September 28, 1997 and Year Ended December 31, 1996..... 90
Notes to Consolidated Financial Statements................................. 91
</TABLE>
84
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Starwave Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Starwave Corporation and its subsidiaries at October 4,
1998 and September 28, 1997, and the results of their operations and their
cash flows for the year ended October 4, 1998 and the nine months ended
September 28, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As described in Note 1, in April 1997, May 1998 and November 1998 the
Company completed a number of transactions which significantly changed its
capital and operating structure.
PricewaterhouseCoopers LLP
Seattle, Washington
November 18, 1998
85
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Starwave Corporation:
We have audited the accompanying balance sheet of Starwave Corporation as of
December 31, 1996, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Starwave Corporation as of
December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
KPMG LLP
Seattle, Washington
February 7, 1997
86
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
October 4, September 28, December 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
ASSETS
------
Cash and cash equivalents................ $ 1,415 $ 18,306 $ 305
Accounts receivable, net................. 165 163 2,950
Accounts receivable from related
parties................................. 897 611 --
Receivable from affiliate................ 516 1,292 --
Other receivables........................ 10 60 73
Deferred royalties, net.................. -- -- 783
Prepaid expenses and other assets........ 803 378 787
Equipment and leasehold improvements, net
(Note 3)................................ 4,629 4,323 4,815
Investment in affiliates................. 7,377 4,328
--------- --------- --------
$ 15,812 $ 29,461 $ 9,713
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
------------------------------------
Accounts payable......................... $ 1,816 $ 1,500 $ 3,277
Accrued compensation..................... 3,365 1,555 629
Accrued royalties........................ 250 500 2,087
Accrued liabilities of discontinued
operations (Note 9)..................... 347 359 519
Other accrued liabilities................ 66 118
Due to affiliates........................ 1,023 1,922 --
Deferred revenue......................... 60 11 651
Loans from shareholder (Note 4).......... -- -- 84,888
--------- --------- --------
Total liabilities.................... 6,927 5,847 92,169
--------- --------- --------
Commitments (Notes 6 and 8)
Shareholders' equity (deficit)
Common stock A, $.01 par value;
authorized 250,000 shares in 1998,
1997 and 1996; issued and outstanding
57,660 shares in 1998, 55,512 shares
in 1997 and 34,214 shares in 1996..... 576 555 342
Common stock B, $.01 par value;
authorized 80,000 shares in 1998, 1997
and 1996, issued and outstanding
39,869 shares in 1998 and 1997, and no
shares in 1996........................ 399 399 --
Additional paid-in capital............. 127,198 123,095 138
Deferred stock option compensation
expense............................... (3,599) (172) (246)
Accumulated deficit.................... (115,689) (100,263) (82,690)
--------- --------- --------
Total shareholders' equity
(deficit)........................... 8,885 23,614 (82,456)
--------- --------- --------
$ 15,812 $ 29,461 $ 9,713
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
87
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended Nine-months ended Year ended
October 4, September 28, December 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Revenues............................ $ 5,266 $ 4,892 $ 8,302
-------- -------- --------
Operating expenses
Cost of online services........... 3,143 7,185 18,170
Development....................... 1,225 1,605 6,138
Sales and marketing............... 94 1,589 5,492
General and administrative........ 2,772 2,527 4,845
-------- -------- --------
Total operating expenses........ 7,234 12,906 34,645
-------- -------- --------
Operating loss...................... (1,968) (8,014) (26,343)
-------- -------- --------
Other income (expense)
Loss from affiliate--EIV.......... (4,139) (2,251) --
Loss from affiliate--AIV.......... (10,020) (5,958) --
Interest income (expense), net.... 748 (1,814) (4,675)
Other, net (Note 10).............. (47) 464 (658)
-------- -------- --------
Net other expense............... (13,458) (9,559) (5,333)
-------- -------- --------
Loss from continuing operations..... (15,426) (17,573) (31,676)
-------- -------- --------
Discontinued operations (Note 9)
Loss from operations of Multimedia
CD-ROM segment................... -- -- (1,046)
Loss on disposal of Multimedia CD-
ROM segment...................... -- -- (3,243)
-------- -------- --------
Loss from discontinued
operations..................... -- -- (4,289)
-------- -------- --------
Net loss............................ $(15,426) $(17,573) $(35,965)
======== ======== ========
Basic and diluted net loss per share
from continuing operations......... $ (.16) $ (0.25) $ (0.99)
Basic and diluted net loss per share
from discontinued operations....... -- -- (0.14)
-------- -------- --------
Basic and diluted net loss per
share.............................. $ (.16) $ (0.25) $ (1.13)
======== ======== ========
Shares used in computing basic and
diluted net loss per share......... 96,475 71,691 31,958
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
88
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
October 4, 1998, September 28, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Deferred Total
Common stock Additional stock option shareholders'
-------------- paid-in compensation Accumulated equity
Shares Amount capital expense deficit (deficit)
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 28,683 $287 $ (215) $ (46,725) $(46,653)
Exercise of stock
options................ 5,531 55 (41) 14
Deferred compensation
expense related to
issuance of stock
options................ -- -- 394 $ (394) -- --
Amortization of deferred
stock option
compensation expense... -- -- -- 148 -- 148
Net loss................ (35,965) (35,965)
------ ---- -------- ------- --------- --------
Balance at December 31,
1996................... 34,214 342 138 (246) (82,690) (82,456)
Exercise of stock
options................ 2,612 26 (20) -- -- 6
Stock repurchase........ (1,935) (19) (3,950) -- -- (3,969)
Sale of common stock
Common Stock A........ 20,621 206 45,458 -- -- 45,664
Common Stock B........ 39,869 399 81,469 -- -- 81,868
Amortization of deferred
stock option
compensation expense... -- -- -- 74 -- 74
Net loss................ -- -- -- -- (17,573) (17,573)
------ ---- -------- ------- --------- --------
Balance at September 28,
1997................... 95,381 954 123,095 (172) (100,263) 23,614
Exercise of stock
options................ 2,148 21 144 -- -- 165
Deferred compensation
expense related to
issuance of stock
options................ -- -- 4,232 (4,232) -- --
Forfeitures of nonvested
stock options.......... -- -- (273) 273 -- --
Amortization of deferred
stock option
compensation expense... -- -- -- 532 -- 532
Net loss................ -- -- -- -- (15,426) (15,426)
------ ---- -------- ------- --------- --------
Balance at October 4,
1998................... 97,529 $975 $127,198 $(3,599) $(115,689) $ 8,885
====== ==== ======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
89
<PAGE>
STARWAVE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended Nine-months ended Year ended
October 4, September 28, December 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss............................ $(15,426) $(17,573) $(35,965)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities
Depreciation and amortization of
equipment and leasehold
improvements...................... 2,855 1,629 2,170
Equity in losses from affiliates... 14,159 8,209 --
Loss on sale of equipment.......... 21 36 90
Amortization of deferred stock
compensation expense.............. 532 74 148
Change in certain assets and
liabilities
Accounts receivable (trade) and
accounts receivable from related
parties.......................... (288) 2,176 (2,216)
Receivable from affiliate and
other receivables................ 826 (1,279) 179
Deferred royalties................ 783 (755)
Prepaid expenses and other
assets........................... (425) 572 (253)
Net assets and accrued liabilities
of discontinued operations....... (12) (160) 1,571
Accounts payable.................. 316 (1,777) 2,567
Accrued interest on loans from
shareholder...................... -- -- (286)
Accrued compensation.............. 1,810 926 356
Accrued royalties................. (250) (1,587) 2,087
Due to affiliates................. (899) 1,922 (47)
Deferred revenue.................. 49 (640) 353
Other accrued liabilities......... 66 (118) (59)
-------- -------- --------
Net cash provided by (used) in
operating activities............ 3,334 (6,807) (30,060)
-------- -------- --------
Cash flows from investing activities
Purchase of equipment and leasehold
improvements....................... (3,182) (1,336) (3,358)
Proceeds from sale of equipment..... -- -- 37
Expenses incurred on behalf of
affiliates......................... (17,208) (12,537) --
-------- -------- --------
Net cash used in investing
activities...................... (20,390) (13,873) (3,321)
-------- -------- --------
Cash flows from financing activities
Increase in loans from shareholder.. -- 10,776 33,863
Repayment of loans from
shareholders....................... -- (50,000) --
Decrease in bank overdraft.......... -- -- (191)
Proceeds from sale of stock, net.... -- 81,868 --
Funds used for stock repurchase..... -- (3,969) --
Proceeds from exercise of stock
options............................ 165 6 14
-------- -------- --------
Net cash provided by financing
activities...................... 165 38,681 33,686
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents.................... (16,891) 18,001 305
Cash and cash equivalents at
beginning of year................... 18,306 305 --
-------- -------- --------
Cash and cash equivalents at end of
year................................ $ 1,415 $ 18,306 $ 305
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for
interest............................ $ 41 $ 2,099 $ 4,889
Schedule of noncash financing
activities
Equity issued to shareholder in
return for extinguishment of debt... -- $ 45,664 --
Issuance of stock options............ $ 4,232 -- --
Forfeitures of nonvested stock
options............................. $ 273 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
90
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 4, 1998, September 28, 1997 and December 31, 1996
(In Thousands, except per share amounts)
1. Change in capital and operating structure
In April 1997, Starwave Corporation (the Company) completed a number of
transactions to recapitalize its equity structure and change its operating
structure as follows. As of April 22, 1997, The Walt Disney Company (Disney)
purchased a controlling interest in the Company (Note 7). A portion of the
proceeds from the sale of common stock to Disney was used to repay part of the
outstanding balance under the loan from the Company's primary shareholder. The
remaining balance of the loan from shareholder was converted to Class A common
stock (Note 4). Effective April 1, 1997, the Company established a wholly
owned subsidiary, Starwave Ventures, Inc. (SVI). Concurrent with the Disney
equity transaction, two new partnerships were formed and the majority of the
Company's operations were contributed to those partnerships. The Company
maintains website hosting, software development and research, and the majority
of its website operations costs are allocated to the partnerships. The
structure and purpose of the partnerships is summarized in Note 2. From April
1997, substantially all of the Company's operations were transferred to the
partnerships. Certain expenses of the partnerships are incurred by the Company
and allocated to the partnerships.
In May 1998, Disney completed the recapitalization by purchasing the
remaining outstanding shares from the primary shareholder for a majority
interest in the Company (Note 7).
The Company and it shareholders have approved a merger of the Company and
Infoseek Corporation (Infoseek) as of November 18, 1998 (Note 11).
2. Description of business and summary of significant accounting policies
Description of business
The Company produces Internet-based services intended to appeal to broad
consumer interests in sports, news and entertainment.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. Future revenues from online services are dependent on the
continued growth and acceptance of the Internet, use of the Internet for
information, publication, distribution and commerce, and acceptance of the
Internet as an effective advertising medium. In 1997, the Company established
partnerships with related parties to produce the online services summarized as
follows:
ABC News/Starwave Partners
On April 1, 1997, SVI and DOL Online Investments, Inc. (DOL), entered into a
partnership for the production of Internet-based services intended to appeal
to a broad consumer interest in news and entertainment-related content areas.
SVI contributed the technical expertise, labor, and infrastructure, and DOL
contributed licensed content. SVI is allocated a 60% economic interest in
partnership losses, and a 50% interest in partnership gains. DOL is allocated
a 40% economic interest in partnership losses and a 50% interest in
partnership gains.
The partners make contributions to the partnership based on actual
development and production expenses incurred on behalf of the partnership or
on formulas and sharing ratios for general and administrative expenses as
defined in the partnership agreement. For the year ended October 4, 1998,
contributions to the partnership totaled $19,137, of which $11,483 was
contributed by SVI during the year and $1,023 is due to the partnership and is
included in amounts due affiliates. For the nine months ended September 28,
1997, contributions to the
91
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
partnership totaled $14,416, of which $8,660 was contributed by SVI during the
year and $1,922 was due to the partnership and is included in amounts due
affiliates. The Company considers the methodology of allocation of
contributions reasonable.
ESPN/Starwave Partners
On April 1, 1997, SVI and ESPN Online Investments, Inc. (EOL), entered into
a partnership for the production of Internet-based services intended to appeal
to a broad consumer interest in sports-related content areas. SVI contributed
the technical expertise, labor and infrastructure, and EOL contributed
licensed content. SVI is allocated a 60% economic interest in partnership
losses and a 50% economic interest in partnership gains. EOL is allocated a
40% economic interest in partnership losses and a 50% economic interest in
partnership gains.
The partners make contributions to the partnership based on actual
development and production expenses incurred on behalf of the partnership or
on formulas and sharing ratios for general and administrative expenses as
defined in the partnership agreement. For the year ended October 4, 1998,
contributions to the partnership totaled $9,559, of which $5,735 was
contributed by SVI during the year and $516 is due from the partnership and is
included in amounts receivable from affiliates. For the nine months ended
September 28, 1997, contributions to the partnership totaled $7,972, of which
$5,377 was contributed by SVI during the period and $1,203 was due from the
partnership and is included in amounts receivable from affiliates. The Company
considers the methodology of allocation of contributions reasonable.
Included in other income (expense) for fiscal years 1998 and 1997 are losses
from these partnerships of $14,159 and $8,209, respectively. Certain assets
transferred by the Company to the partnerships upon formation were recorded at
book value.
Summarized financial information from the financial statements of the
partnerships is as follows:
<TABLE>
<CAPTION>
ESPN/Starwave ABC News/Starwave
Partners Partners
------------------------ ------------------------
October 4, September 28, October 4, September 28,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Current assets.......... $ 8,823 $ 4,985 $ 6,505 $ 4,256
Noncurrent assets....... 479 84 3,967 3,134
Current liabilities..... 3,906 2,333 3,574 2,930
Noncurrent liabilities.. -- -- -- --
Revenues................ 19,193 6,996 9,878 1,929
Cost of online
services............... 15,715 7,168 18,182 9,015
Net loss................ (6,899) (3,752) (16,699) (9,930)
</TABLE>
Basis of presentation
The consolidated financial statements include the accounts of Starwave
Corporation and its wholly owned subsidiary, Starwave Ventures, Inc. All
significant intercompany transactions have been eliminated. Investments in
partnerships are accounted for using the equity method of accounting.
Fiscal year change
Effective April 1, 1997, the Company changed its fiscal year-end from a
calendar year ended December 31 to a fiscal year ending the Sunday in the last
week of September. For the purposes of the consolidated financial statements,
fiscal year 1998 ended October 4, 1998.
92
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is selected financial data for the year ended October 4, 1998
and the comparable period ended September 28, 1997:
<TABLE>
<CAPTION>
Year ended Year ended
October 4, 1998 September 28, 1997
--------------- ------------------
(unaudited)
<S> <C> <C>
Revenues............................... $ 5,266 $ 8,611
-------- --------
Operating expenses
Cost of online services.............. 3,143 14,309
Development.......................... 1,225 2,157
Sales and marketing.................. 94 4,209
General and administrative........... 2,772 3,983
-------- --------
Total operating expenses........... 7,234 24,658
-------- --------
Operating loss......................... (1,968) (16,047)
-------- --------
Other income (expense)
Earnings (loss) from affiliate EIV... (4,139) (2,251)
Earnings (loss) from affiliate AIV... (10,020) (5,958)
Interest income (expense), net....... 748 (3,302)
Other, net........................... (47) (142)
-------- --------
Net other expense.................. (13,458) (11,653)
-------- --------
Net loss............................... $(15,426) $(27,700)
======== ========
</TABLE>
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less.
Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of equipment and leasehold improvements are provided on the
straight-line method over the estimated useful lives of the assets or the
lease term, whichever is shorter. Estimated useful lives range from one to six
years.
Deferred royalties
Deferred royalties represent payments made or accrued to co-branding
partners and independent content providers under development and production
agreements. Amortization begins upon launch of the applicable online service
and is based on the greater of amounts determined by the contractual royalty
rates or amounts computed on a straight-line basis over the term of the
agreements. In April 1997, all significant deferred revenues were contributed
to the partnerships.
Revenue recognition and concentration of credit risk
Revenues from subscriptions to the Company's online services and advertising
appearing on the Company's online services were recognized on the straight-
line method over the terms of the subscriptions and advertising contracts,
respectively. Advertising revenues were stated net of commissions. Deferred
revenue represented online subscriptions and customer advertising not yet
recognized as revenue.
93
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company guaranteed to certain advertising customers a minimum number of
page impressions to be delivered to users of its online service for a
specified period. To the extent minimum guaranteed page impression deliveries
are not met, the Company defers recognition of the corresponding revenues
until guaranteed page impression delivery levels are achieved. As of October
4, 1998, September 28, 1997 and December 31, 1996, no revenues had been
deferred as a result of these guarantees. As described above, beginning in
April 1997 all advertising and subscription revenues are recognized by the
partnerships.
The Company has two software license arrangements with related parties. The
software licenses are one-time fees and are recognized at the time the
software master is delivered and when the criteria for fixed fee revenue
recognition under Statement of Position 91-1, Software Revenue Recognition,
are satisfied. The Company has contracted to provide for additional post-
contract support for a fee, which is recognized over the period of the
contract. License and post contract support revenues amounted to $1,779 and
$401 for the periods ended October 4, 1998 and September 28, 1997,
respectively.
During fiscal years 1998 and 1997, the Company had revenues from related
parties representing 58% and 52% of revenues, respectively. At October 4, 1998
and September 28, 1997, related party receivables represented 84% and 79%,
respectively of trade accounts receivable. The Company had no revenues or
accounts receivable from related parties as of and for the year ended December
31, 1996.
Development expenses
Development expenses relate to the development of new online services and
consist principally of compensation to company employees, as well as costs for
content, facilities and equipment. Development expenses are charged to results
of operations as incurred. Once an online service is launched and available to
generate revenues, expenses associated with enhancements and developments of
new features for the service are included in cost of online services, and
beginning in April 1997, are allocated to the partnerships. For the year ended
October 4, 1998, the development expenses consist mainly of the expenses
associated with the core technology software used to run the online services.
Advertising expenses
Advertising and promotion costs are expensed as incurred. The Company
incurred advertising costs of $80, $451 and $1,203 in fiscal years 1998, 1997
and 1996, respectively.
Federal income taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to be recovered or settled. The effect on deferred income tax
assets and liabilities of changes in tax rates is recognized in income in the
period that includes the enactment date.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts receivable from related parties, receivable from affiliate, other
receivables, accounts payable, accrued compensation, accrued royalties and due
to affiliates approximates fair value due to the short-term maturity of these
instruments.
94
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock option plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant to
employees only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 for transactions with
employees and provide pro forma disclosures for employee stock option grants
made in 1995 and future years as if the fair value-based method defined in
SFAS No. 123 had been applied to these transactions. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 to these
transactions and provide the pro forma disclosure provisions of SFAS No. 123.
Net loss per share
Basic net loss per share represents net loss divided by the weighted average
number of shares outstanding during the period. Diluted net loss per share
represents net loss divided by the weighted average number of shares
outstanding including the potentially dilutive impact of the stock options.
Common stock options are converted using the treasury stock method. Basic and
diluted net loss per share are equal for the periods presented because the
impact of stock options is anti-dilutive.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
presentation.
Accounting changes
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS
130), Reporting Comprehensive Income, was issued. This pronouncement requires
companies to report comprehensive income and its components prominently in the
financial statements. Comprehensive income includes both net income and
charges or credits to equity that are not the results of transactions with
owners. SFAS 130 is required to be adopted for fiscal years beginning after
December 15, 1997. The Company does not have any comprehensive income items
other than net income; therefore, SFAS 130 is not expected to impact the
Company.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS),
Accounting for Derivative Instruments and Hedging Activities, was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. SFAS 133 is required to
be adopted for fiscal years beginning after June 15, 1999. Since the Company
does not hold any derivative instruments, SFAS 133 is not expected to impact
the Company.
95
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1997, Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, was issued. This pronouncement outlines criteria which must be
satisfied before revenue selling or licensing software can be recognized. SOP
97-2 is required to be adopted for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is currently reviewing the
requirements of SOP 97-2 and assessing its impact on the Company's financial
statements.
3. Equipment and leasehold improvements
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
October 4, September 28, December 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Equipment.......................... $11,510 $ 9,879 $ 9,171
Leasehold improvements............. 1,699 826 403
------- ------- -------
13,209 10,705 9,574
Less: Accumulated depreciation and
amortization...................... (8,580) (6,382) (4,759)
------- ------- -------
Net equipment and leasehold
improvements...................... $ 4,629 $ 4,323 $ 4,815
======= ======= =======
</TABLE>
4. Loans from shareholder
During 1995 and 1996, the Company's majority shareholder made unsecured
loans to the Company under a $100,000 credit agreement which did not require
repayment of principal until October 31, 1999, at which time the entire
outstanding balance was due. The loans accrued interest at a rate which varied
based on the higher of the Citibank, N.A. base rate or 0.5% above certain
money market rates. In April 1997, the balance of the loan was repaid via a
cash repayment of $50,000, and conversion of the remaining $45,664 to Class A
common stock.
5. Income taxes
A current provision for income taxes has not been recorded for the year
ended October 4, 1998, the period ended September 28, 1997 or the year ended
December 31, 1996 due to taxable losses incurred during such periods. A
valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income
prior to expiration of net operating loss carry-forwards. Deferred tax assets
are summarized as follows:
<TABLE>
<CAPTION>
October 4, September 28, December 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Capitalized "start-up" expenses..... $ 1,824 $ 2,635 $ 2,635
Net operating loss carry-forward.... 24,369 18,633 12,730
Other............................... 1,170 902 512
------- -------- --------
Gross deferred tax assets........... 27,363 22,170 15,877
Less: Valuation allowance........... (27,363) (22,170) (15,877)
------- -------- --------
Net deferred tax assets............. $ -- $ -- $ --
======= ======== ========
</TABLE>
96
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of expected income taxes at the federal statutory rate of
34% to the actual tax expense of $0 is:
<TABLE>
<CAPTION>
Year ended Nine-months ended Year ended
October 4, September 28, December 31,
1998 1997 1996
---------- ----------------- ------------
<S> <C> <C> <C>
Tax at statutory rate........... $(5,245) $(5,975) $(12,228)
Change in valuation allowance... 5,193 6,293 12,126
Other........................... 52 (318) 102
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
As of October 4, 1998, the Company has approximately $70,185 of net
operating loss carry-forwards available to offset future taxable income, if
any, through 2012.
Under the provisions of the IRC, utilization of the Company's net operating
loss carry-forwards may be subject to limitation if it should be determined
that a greater than 50% ownership change were to occur in the future. The
Company has determined that such a change occurred in May 1998 and November
1998 and the annual utilization of loss carry-forwards generated through those
periods will be limited.
6. Stock option plan
The Company has a Combined Incentive and Nonqualified Stock Option Plan (the
Plan) for employees, directors, consultants or independent contractors whereby
140,000 shares of Class A common stock are reserved for stock option grants.
Pursuant to the Plan, the Board of Directors may grant nonqualified and
incentive stock options. The vesting period, exercise price and expiration
period of options are established at the discretion of the Board of Directors.
However, in no event shall the term of any incentive stock option exceed ten
years. All option grants to date vest over periods ranging from three to four
years, and expire ten years from the date of grant.
The per share weighted average fair value of stock options granted during
1998, 1997 and 1996 was $5.87, $1.62 and $0.11, respectively, on the date of
grant using the Black Scholes option-pricing model with the following weighted
average assumptions: fiscal years 1998, 1997 and 1996--expected dividend yield
0%; risk-free interest rate of 5.61%, 6.28% and 6.14%, respectively, and an
expected life of 4.26, 2.68 and 2.89 years, respectively.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, compensation cost has been recognized for its stock options in
the financial statements only to the extent that the exercise price of the
option is less than the fair value of the underlying stock on the date of the
grant. In fiscal years 1998, 1997 and 1996 the Company recorded deferred
compensation relating to the issuance of stock options less than fair value of
$4,232, $0 and $394, respectively. Amortization of these costs amounted to
$532, $74, and $148 for the fiscal years 1998, 1997 and 1996, respectively.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
October 4, September 28, December 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net loss
As reported............. $(15,426) $(17,573) $(35,965)
Pro forma............... (16,595) (18,116) (36,049)
Basic and diluted net
loss per share
As reported............. (.16) (.25) (1.13)
Pro forma............... (.17) (.25) (1.13)
</TABLE>
97
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma net loss reflects only options granted in fiscal years 1998, 1997,
1996 and 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net loss
and net loss per share amounts presented above because compensation cost is
reflected over the options' vesting period of three to four years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
The following summarizes the activity, restated for the common stock split
(Note 7), under the Company's plan:
<TABLE>
<CAPTION>
Weighted
Weighted average
Number average fair value
of exercise of options
shares price granted
------ -------- ----------
<S> <C> <C> <C>
Balances at December 31, 1995.................. 11,568 $0.003
Options granted:
Exercise price equal to fair value........... 3,420 0.27 $0.03
Exercise price less than fair value.......... 1,920 0.09 0.22
Options exercised............................ (5,531) 0.003
Options canceled............................. (1,300) 0.03
------
Balances at December 31, 1996.................. 10,077 0.105
Options granted:
Exercise price equal to fair value........... 4,383 2.27 1.62
Options exercised............................ (2,612) 0.01
Options canceled............................. (816) 0.12
------
Balances at September 28, 1997................. 11,032 0.99
Options granted:
Exercise price equal to fair value........... 935 3.79 8.32
Exercise price less than fair value.......... 740 2.95 2.95
Options exercised............................ (2,148) .08
Options canceled............................. (1,453) 1.24
------
Balances at October 4, 1998.................... 9,106 3.41
Options exercisable at:
December 31, 1996............................ 2,800 .025
September 28, 1997........................... 3,116 .38
October 4, 1998.............................. 3,941 1.04
</TABLE>
At October 4, 1998, 143,447 shares remained reserved and available for grant
under the Plan.
98
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
under the Plan at October 4, 1998:
<TABLE>
<CAPTION>
Weighted average
Exercise Number remaining Weighted average Number Weighted average
price outstanding contractual life exercise price exercisable exercise price
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.003 1,275 6.75 $0.003 673 $0.003
0.09 1,451 7.70 0.09 1,147 0.09
0.15-.44 945 7.84 .42 443 .42
2.27 4,182 8.52 2.27 1,678 2.27
2.95 1,013 9.09 2.95
4.47-8.81 221 9.91 7.06
9.32 2 9.73 9.32
9.85 11 9.75 9.85
9.94 6 9.74 9.94
----- -----
9,106 8.23 $ 3.41 3,941 $ 1.04
===== =====
</TABLE>
7. Equity
As of April 22, 1997, the Company amended its Articles of Incorporation to
authorize the issuance of two new classes of shares, designated, respectively,
Class A common stock and Class B common stock. As of October 4, 1998, the
Company had the authority to issue 250,000 shares and 80,000 shares of Class A
common stock and Class B common stock, respectively, at a par value of $.01
per share. Each holder of Class A common stock is entitled to one vote per
share owned and each holder of Class B common stock is entitled to 2 1/2 votes
per share owned. Class B shares may be converted into one share of Class A
common stock at any time, and the transfer of Class B shares to a third party
results in its automatic conversion to Class A shares. Each outstanding share
of common stock on the date of amendment became one share of Class A common
stock.
As established in the Stock Purchase Agreement dated March 28, 1997,
effective April 22, 1997 Disney obtained a controlling interest in the Company
by purchasing 39,869 shares of the Company's Class B common shares. The
initial purchase proceeds provided $31,868 in cash to the Company, and
extinguished loans from a key shareholder of $50,000 (Note 4). The agreement
provides that Disney has the option to acquire all of the outstanding Class A
shares held by key shareholders and employees at a predetermined price.
On May 1, 1998, Disney exercised this option and acquired all of the
outstanding Class A shares from the primary shareholder, thereby increasing
its percentage ownership of the Company's outstanding common stock from
approximately 41% to approximately 91% on a primary share basis.
Common stock split
On October 4, 1997, the Board of Directors declared a four-for-one stock
split on the Company's Class A and Class B common stock effected in the form
of a stock dividend to holders of record on that date. Class A and Class B
common stock issued, including stock option information, and additional paid-
in capital for all years have been restated to reflect this split.
99
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments
The Company occupies its current facilities under terms of a noncancelable
operating lease that expires in May 2001, subject to extensions at the
Company's option. At October 4, 1998, future minimum rental payments under the
lease are as follows:
<TABLE>
<CAPTION>
Year ending September,
----------------------
<S> <C>
1999.............................................................. $1,502
2000.............................................................. 1,206
2001.............................................................. 550
------
$3,258
======
</TABLE>
Rent expense under noncancelable operating leases amounted to $1,493, $871
and $931 in fiscal years 1998, 1997 and 1996, respectively.
During fiscal year 1998, the Company entered into separation agreements with
certain employees. The terms of these agreements include severance payments
based on staff level and years of service, accelerated stock option vesting
and payment of post-employment insurance premiums. The termination of
employees under these separation agreements is contingent upon completion of
the Infoseek merger, and the Company's obligations under the agreements will
transfer to Infoseek at that time. Accordingly, no liability for these
arrangements has been recorded by the Company as of October 4, 1998.
9. Discontinued operations
In March 1996, the Company made the decision to discontinue its multimedia
CD-ROM segment. During the phase-out period, the Company completed production
of its final CD-ROM product and disposed of its remaining inventory of CD-ROM
products currently released. The phase-out period was completed by March 31,
1997. Operating results of the Multimedia CD-ROM segment for 1996 are shown
separately in the accompanying consolidated statements of operations. Any
activity subsequent to December 31, 1996 reduced the net liability.
Accrued liabilities of discontinued operations consist of the following:
<TABLE>
<CAPTION>
October 4, September 28, December 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Accounts payable and accrued
liabilities............................ $(347) $(359) $(500)
Accrual for expected losses during
phase-out period....................... (19)
----- ----- -----
$(347) $(359) $(519)
===== ===== =====
</TABLE>
Net revenues and expenses of the Multimedia CD-ROM segment consist of the
following:
<TABLE>
<CAPTION>
October 4, September 28, December 31,
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Net revenues......................... $-- $-- $ 664
Expenses............................. (4,934)
Accrual for expected losses during
phase-out period.................... (19)
--- --- -------
Loss from discontinued operations.... $-- $-- $(4,289)
=== === =======
</TABLE>
100
<PAGE>
STARWAVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recognized revenues from CD-ROM product sales at the time of
shipment from the Company's distributor. The estimated effect of price
protection programs and product returns were recorded as reductions to
revenue.
10. Other expense
During 1996, the Company incurred legal and accounting fees of $606 in
connection with a proposed initial public offering, which was not completed.
As a result, the costs were expensed in 1996 and included in other expenses.
11. Subsequent event
On November 18, 1998, the Company's shareholders approved a merger with
Infoseek Corporation (Infoseek), a developer and retailer of Internet
technology. Under the terms of the agreement, Infoseek acquired 100% of the
Company's outstanding common stock for approximately 25,512 shares of Infoseek
common stock and assumed options outstanding under the Company's stock option
plans for an aggregate of approximately 2,626 options for Infoseek common
stock. In connection with this acquisition, the joint venture terms of the ABC
News/Starwave Partners and ESPN/Starwave Partners are extended for ten years
from the date of the acquisition.
Upon closing of the transaction, Infoseek and Starwave will become wholly
owned subsidiaries of a newly organized holding company, Infoseek Corporation
(Newco), incorporated in Delaware. Shares of Newco, a registered public
company, will trade on Nasdaq and will be held by the former shareholders of
Infoseek and Starwave.
101
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective April 24, 1997, Starwave's Board of Directors dismissed KPMG LLP
(the "Former Accountants") as its independent accountants and engaged
PricewaterhouseCoopers LLP. The reports of the Former Accountants on the
financial statements of Starwave for the fiscal years ended December 31, 1996
and 1995 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the period of the Former Accountants' engagement in Starwave's two most
recent fiscal years, there were no disagreements with the Former Accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of the Former Accountants would have caused them
to make reference thereto in their report on Starwave's financial statements.
Prior to April 24, 1997, Starwave had not consulted with
PricewaterhouseCoopers LLP on items regarding the application of accounting
principles to a specific completed or contemplated transaction, the type of
audit opinion that might be rendered on Starwave's financial statements, or
any matter that was the subject of a disagreement or reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning Infoseek's
current executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Harry M. Motro................. 38 President, Chief Executive Officer and
Director
Patrick Naughton............... 33 Executive Vice President of Products
Leslie E. Wright............... 45 Senior Vice President, Chief
Administrative Officer and Chief
Financial Officer
Barak Berkowitz................ 45 Senior Vice President, Marketing and
International
Bhagwan D. ("B.D.") Goel....... 35 Senior Vice President and General
Manager, Commerce
Beth A. Haggerty............... 39 Senior Vice President, Worldwide Sales
and Strategic Partnerships
Andrew E. Newton............... 55 Vice President, General Counsel and
Secretary
Steven T. Kirsch............... 42 Chairman of the Board of Directors,
Senior Vice President, Kirschworks
Steven M. Bornstein*........... 46 Director
Robert A. Iger*(1)............. 47 Director
L. William Krause(2)........... 56 Director
Matthew J. Stover(1)........... 43 Director
Jacob ("Jake") J.
Winebaum*(2).................. 39 Director
John E. Zeisler(2)............. 46 Director
</TABLE>
- --------
* Messrs. Bornstein, Iger and Winebaum were appointed to the Infoseek Board
of Directors pursuant to the terms of a governance agreement entered into
between Infoseek and Disney in connection with Infoseek's acquisition of
Starwave and related transactions. See "Business--Relationship with
Disney."
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Harry M. Motro joined Infoseek in April 1997 as its President and was
appointed Chief Executive Officer and a director of Infoseek in May 1997. From
1995 to April 1997, Mr. Motro served as Senior Vice President of Cable News
Network Inc. in charge of CNN Interactive and News Business Development. From
1988 to 1995, Mr. Motro served in several executive positions with Turner
Broadcasting Inc. and CNN, including Director, Special Projects and External
Reporting, Assistant Vice President, Finance, and Vice President, Business
Development and Strategic Planning. From 1982 to 1988, Mr. Motro served as
Manager, Audit Services, with Coopers & Lybrand LLP. Mr. Motro holds a B.S.
degree in Business from the University of Virginia. Mr. Motro is also a member
of the committee which oversees Go Network.
102
<PAGE>
Patrick J. Naughton joined Infoseek in November 1998 as Senior Vice
President and Chief Technical Officer and became Executive Vice President of
Products in January 1999. Prior to joining Infoseek, Mr. Naughton was
President and Chief Technology Officer of Starwave, which position he had held
since April 1997. From July 1996 to April 1997, Mr. Naughton served as
Starwave's Senior Vice President, Technology. From October 1994 to July 1996,
Mr. Naughton served as Starwave's Vice President, Technology. From January
1993 to October 1994, Mr. Naughton served as Chief Technologist of First
Person, Inc., a Sun Microsystems subsidiary formed to commercialize Java
technologies. Beginning in June 1988, Mr. Naughton was employed by Sun
Microsystems, where he was involved in a research project in December 1990 in
the Sun Microsystems Laboratories which conceived the Java programming
language. Mr. Naughton holds a B.S. degree in Computer Science from Clarkson
University.
Leslie E. Wright joined Infoseek in August 1997 as Vice President, Finance
and Chief Financial Officer and was appointed Senior Vice President and Chief
Operating Officer in August 1998. In November 1998, Mr. Wright resumed the
role of Chief Financial Officer in addition to his role as Senior Vice
President and Chief Operating Officer. In January 1999, Mr. Wright became
Senior Vice President, Chief Administrative Officer and Chief Financial
Officer. From 1994 to July 1997, Mr. Wright worked with Fractal Design
Corporation, a graphics software company, where from May 1995 to July 1997 he
served as Chief Operating Officer. From 1984 to 1994, Mr. Wright worked with
The ASK Group, Inc., a software company, where from 1986 through 1994, he
served as Executive Vice President and Chief Financial Officer. Mr. Wright
holds a B.S. degree in Business from San Jose State University and is a
Certified Public Accountant in the State of California.
Barak Berkowitz joined Infoseek in October 1997 as Vice President, Marketing
and became Senior Vice President and General Manager, GO Network in November
1998. In January 1999, Mr. Berkowitz was appointed Senior Vice President,
Marketing and International. In August 1990, Mr. Berkowitz founded
MarketCentrix, a marketing consulting firm servicing technology-based
companies. Mr. Berkowitz acted as President of MarketCentrix from August 1990
to July 1994, and again from October 1996 until October 1997. From July 1994
to October 1996, Mr. Berkowitz was Vice President and General Manager for the
American region of Logitech, Inc., a computer peripherals company. Mr.
Berkowitz studied Psychology and Biology at the City College of New York.
Bhagwan D. ("B.D.") Goel joined Infoseek in September 1998 as Senior Vice
President and General Manager, Commerce. From 1996 to 1998, Mr. Goel served as
Vice President Products and Services of Internet Shopping Network, an internet
business infrastructure company and wholly-owned subsidiary of USA Networks,
Inc. From 1994 to 1996, Mr. Goel served as Vice President, Products
Development for Worldwide Systems Corporation, a publisher of online travel
information and a joint venture between Ameritech and Random House. From 1989
to 1994, Mr. Goel was Director of Product Development for KnowledgeSet
Corporation (now Banta Intergrated Media), a developer of alternative
electronic media applications. Mr. Goel holds a Bachelor of Technology in
Electrical Engineering from the Indian Institute of Technology in New Delhi,
India, and an M.S. degree in Electrical Engineering from the University of
Toledo and is a candidate for a Ph.D. in Computer Science from Michigan State
University.
Beth A. Haggerty joined Infoseek in August 1997 as Vice President, Worldwide
Advertising Sales and became Senior Vice President, Worldwide Sales and
Strategic Partnerships in November 1998. From 1995 to April 1997, Ms. Haggerty
served as Publishing Director of NetGuide Magazine, a CMP Media publication
("CMP"), and most recently as Publishing Director of CMPnet, the Internet
Media Group of CMP. In August 1996, Ms. Haggerty also managed the launch of
CMP's online product, NetGuide Live. From 1994 to 1995, Ms. Haggerty was a
partner and co-founder of Interactive Enterprises, a Ziff Davis venture, and a
Publisher of Inter@ctiveWeek magazine. From 1986 to 1994, Ms. Haggerty served
in various capacities with CMP, including senior-level sales and marketing
management positions for Information Week magazine, National Sales Manager for
Network Computing magazine and Publisher of CommunicationsWeek magazine. Ms.
Haggerty holds a B.S. degree in Political Science from Rutgers University.
Andrew E. Newton, a founder of Infoseek, has served as Vice President and
General Counsel since January 1994 and Secretary since March 1994. From
February 1989 to November 1993, Mr. Newton was Vice President
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<PAGE>
and General Counsel of Frame Technology Corporation, a software engineering
company. Mr. Newton holds an A.B. degree in English from Dartmouth College and
a J.D. degree from Columbia University School of Law.
Steven Bornstein became a director of Infoseek in November 1998. Mr.
Bornstein has been President and Chief Executive Officer of ESPN since
September 1990 and is also a director of ESPN.
Robert Iger became a director of Infoseek in November 1998. Mr. Iger is
President of ABC, Inc., a subsidiary of The Walt Disney Company, which
position he has held since February 1996. Prior thereto, Mr. Iger served as
President and Chief Operating Officer of Capital Cities/ABC, Inc. from
September 1994 to February 1996 and as President of the ABC Television Network
from January 1993 to August 1994. Mr. Iger holds a B.S. in Communications from
Ithaca College.
Steven T. Kirsch, a founder of Infoseek, has been a director of Infoseek
since August 1993 and Chairman of the Board of Directors since December 1995.
From September 1993 to November 1995, Mr. Kirsch also served as President and
Chief Executive Officer of Infoseek and currently is Senior Vice President,
Kirschworks, Infoseek's research and development group. From January 1990 to
December 1993, Mr. Kirsch served as Vice President, New Product Development of
Frame Technology Corporation, a software engineering company which he co-
founded. Mr. Kirsch holds a B.S. degree and an M.S. degree in Electrical
Engineering and Computer Science from the Massachusetts Institute of
Technology.
L. William Krause has served as a director of Infoseek since July 1997.
Since November 1998, Mr. Krause has been President of LWK Ventures, a private
investment company. Mr. Krause served as President, Chief Executive Officer
and as a director of Storm Technology, Inc., a provider of computer
peripherals and software for digital imaging, from October 1991 to November
1998 when it filed for protection under federal bankruptcy laws. Prior to
that, Mr. Krause spent ten years at 3Com Corporation, a manufacturer of global
data networking systems, where he served as President and Chief Executive
Officer until he retired in September 1990. Mr. Krause continued as Chairman
of the Board for 3Com Corporation until 1993. Previously, Mr. Krause served in
various marketing and general management executive positions at Hewlett-
Packard Company. Mr. Krause currently serves as a director of Sybase, Inc. and
Aureal Semiconductor, Inc.
Matthew J. Stover has served as a director of Infoseek since March 1996.
Since December 1997, Mr. Stover has been President and Chairman of the Board
of Bell Atlantic Information Services Group, an international marketing
information services provider. Mr. Stover is also the Chairman of the Board of
Global Directory Services Company. Since January 1994, Mr. Stover has served
as President and Chief Executive Officer of Bell Atlantic Yellow Pages
Company, formerly known as NYNEX Information Resources Company. Since January
1998, Mr. Stover has served as Chairman of the Board of Bell Atlantic Yellow
Pages. Prior to that, Mr. Stover served as President and Chief Executive
Officer of AGS Computers, Inc. from December 1992 to December 1993, Vice
President, Public Affairs and Corporate Communications of NYNEX Corporation
from May 1990 to December 1992 and Vice President, Communications for American
Express Company from 1987 to 1990. Mr. Stover holds a B.A. degree in English
Language and Literature from Yale University and a certificate from the
Executive Program of the University of Virginia, Colgate Darden Graduate
School of Business Administration.
Jacob ("Jake") J. Winebaum became a director of Infoseek in November 1998.
Mr. Winebaum is Chairman of the Buena Vista Internet Group, a subsidiary of
The Walt Disney Company, which position he has held since April 1998. Prior
thereto, Mr. Winebaum was President of the Buena Vista Internet Group from
March 1997 to March 1998; President of Disney Online from July 1995 to March
1998; President of Disney Magazine Publishing from April 1994 to June 1995;
President of Family PC from February 1994 to June 1995; and President of
Family Fun from February 1992 to June 1995. Mr. Winebaum is also a member of
the advisory committee which oversees GO Network.
John E. Zeisler has served as a director of Infoseek since May 1995. Since
October 1996, Mr. Zeisler has served as a General Partner of InterWest
Partners, a venture capital firm. From August 1995 to September 1996,
104
<PAGE>
he served as Senior Vice President, Marketing of NETCOM, an internet company.
From 1992 to 1995, he served as President and Chief Executive Officer of
Pensoft Corporation, a software company. From 1987 to 1992, Mr. Zeisler was a
co-founder and Vice President, Marketing of Claris Corporation, a software
company. Mr. Zeisler holds a B.S. degree in Communications from Boston
University.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid by Infoseek for the nine month fiscal year ended
October 3, 1998 and the fiscal years ended December 31, 1997 and 1996 to the
individuals who served as Infoseek's Chief Executive Officer during the nine
month period ended October 3, 1998 and the four other most highly compensated
executive officers of Infoseek who were serving as such at the end of the nine
month fiscal year ended October 3, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Securities
Name and Principal Fiscal Underlying All Other
Position(1) Year Salary Bonus Options Compensation
------------------ ------ -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Harry M. Motro(2)......... 1998 $187,500 -- 125,000 --
President and Chief
Executive Officer 1997 $169,551 $69,230 1,000,000 $150,000(3)
1996 -- -- -- --
Patrick Naughton(4)....... 1998 $183,617 -- -- --
Executive Vice President
of Products 1997 $220,552 -- 264,957(5) --
1996 $163,164 -- 270,256(5) --
Leslie E. Wright.......... 1998 $131,250 -- 90,000 --
Senior Vice President,
Chief Administrative 1997 $ 60,289 $20,000 137,500 --
Officer and Chief
Financial Officer 1996 -- -- -- --
Andrew E. Newton.......... 1998 $135,000 -- 20,000 --
Vice President, General
Counsel and 1997 $160,000 $65,000 75,000 --
Secretary 1996 $140,000 $80,000 -- --
Barak Berkowitz........... 1998 $135,000 -- 41,250 --
Senior Vice President,
Marketing and
International 1997 $ 39,993 $11,700 165,000 --
1996 -- -- -- --
Beth A. Haggerty.......... 1998 $131,250 -- 35,000 --
Senior Vice President,
Worldwide Sales and 1997 $ 72,250 $50,480 165,000 $50,000(6)
Strategic Partnerships 1996 -- -- -- --
John Nauman............... 1998 $131,250 -- 41,250 --
Vice President,
Engineering of Portal
Products 1997 $175,000 $75,000 -- --
1996 $140,961 $25,000 200,000 --
</TABLE>
- --------
(1) From January 1, 1998 to October 3, 1998, Michael B. Slade and Curt D.
Blake were the Chief Executive Officer and Chief Operating Officer,
respectively, of Starwave and received aggregate salary, bonus and other
compensation of $228,236 and $157,684, respectively. Because each of
Messrs. Slade and Blake terminated their employment with Starwave upon
Infoseek's acquisition of Starwave and thus did not become employees of
Infoseek, Messrs. Slade and Blake are not included in this table. In
addition, because Messrs. Wright and Nauman and Ms. Haggarty received the
same amount of compensation for the nine month fiscal year ended October
3, 1998, each is indicated in this table.
(2) Mr. Motro became President and Chief Executive Officer of Infoseek in the
second quarter of 1997 at an annual salary of $250,000.
(3) Represents a one-time relocation payment to Mr. Motro.
(4) Mr. Naughton was President and Chief Technical Officer of Starwave prior
to Infoseek's acquisition of Starwave on November 18, 1998. Upon such
acquisition, Mr. Naughton became Senior Vice President and Chief Technical
Officer of Infoseek, and he has since been appointed Executive Vice
President of Products.
(5) Options were granted pursuant to Starwave's stock option plans which were
assumed by Infoseek on November 18, 1998. Number reflects conversion from
options for shares of Starwave common stock to options for shares of
Infoseek common stock.
(6)Represents a one-time relocation payment to Ms. Haggerty.
105
<PAGE>
Option Grants in Last Fiscal Year
The following table contains information concerning stock option grants made
during the nine month period ended October 3, 1998 to Infoseek's Chief
Executive Officer and the four other most highly compensated executive
officers who were serving as such at the end of the nine month period ended
October 3, 1998. No stock appreciation rights were granted to these
individuals during such year.
Individual Grants(1)
<TABLE>
<CAPTION>
Number of Potential Realizable Value
Securities % of Total at Assumed Annual Rates
Underlying Options of Stock Price Appreciation
Options Granted to Exercise For Option Term(4)
Granted Employees in Price Expiration ----------------------------
Name (#)(1) Fiscal Year(2) ($/Sh)(3) Date 5% ($) 10% ($)
---- ---------- -------------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Harry M. Motro.......... 125,000 5.19 $19.8125 03/13/08 $1,557,497 $3,947,003
Leslie E. Wright........ 90,000 3.74 $19.8125 03/13/08 $ 1,121,398 $ 2,841,842
Patrick Naughton........ -- -- -- -- -- --
Andrew E. Newton........ 20,000 0.83 $19.8125 03/13/08 $ 249,200 $ 631,520
Barak Berkowitz......... 41,250 1.71 $19.8125 03/13/08 $ 513,973 $ 1,302,511
Beth A. Haggerty........ 35,000 1.45 $19.8125 03/13/08 $ 436,099 $ 1,105,161
John Nauman............. 41,250 1.71 $19.8125 03/13/08 $ 513,974 $ 1,302,511
</TABLE>
- --------
(1) These options were granted under the Infoseek's 1996 Stock Option/Stock
Issuance Plan. The grant dates are for these options as follows: Mr.
Motro: March 13, 1998; Mr. Wright: March 13, 1998; Mr. Newton: March 13,
1998; Mr. Berkowitz: March 13, 1998; Ms. Haggerty: March 13, 1998; Mr.
Nauman: March 13, 1998. Each option has a maximum term of 10 years
measured from the grant date, subject to earlier termination upon the
optionee's cessation of service with Infoseek.
(2) Infoseek granted options to purchase 2,451,230 shares of common stock
during the last fiscal year ended October 3, 1998.
(3) The exercise price may be paid in cash or in shares of Infoseek's common
stock valued at fair market value on the exercise date. Infoseek may also
finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares, together with any federal
and state income tax liability incurred by the optionee in connection with
such exercise.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the commission. There is no assurance that the
actual stock price appreciation over the 10-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the common stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers.
106
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information concerning option exercises and
option holdings during the nine month period ended October 3, 1998 with
respect to Infoseek's Chief Executive Officer and its four other most highly
compensated executive officers who were serving as such at the end of the
period ended October 3, 1998.
<TABLE>
<CAPTION>
Potential Realizeable
Value
Number of At Assumed Annual Rates
Securities Underlying of Stock Price
Shares Unexercised Options Appreciation
Acquired At Fiscal Year End(#) For Option Term($)(1)
Upon Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harry M. Motro.......... -- -- 354,165 770,835 $6,596,323 $12,505,239
Leslie E. Wright........ -- -- 37,239 190,261 $ 693,576 $ 2,210,486
Patrick Naughton........ 36,434 $311,802 332,190 219,583 $6,925,044 $ 3,753,697
Andew E. Newton......... -- -- 23,437 71,563 $ 436,514 $ 1,036,611
Barak Berkowitz......... -- -- -- 206,250 -- $ 2,384,766
Beth A. Haggerty........ -- -- 44,687 155,313 $ 832,295 $ 2,374,267
John Nauman............. -- -- 23,958 67,292 $ 347,391 $ 534,875
</TABLE>
- --------
(1) The value of an "in-the-money" stock option represents the difference
between the aggregate estimated fair market value of the underlying
securities, based on the closing price of $23.6250 per share of Infoseek's
common stock on the Nasdaq Stock Market on October 2, 1998, and the
aggregate exercise price of the subject stock option.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of Infoseek's Board of Directors was formed in
April 1996 and is currently comprised of Messrs. Krause, Zeisler and Winebaum.
Neither of these individuals was at any time during the nine month fiscal
period ended October 3, 1998, or at any other time, an officer or employee of
Infoseek. No member of the Compensation Committee of Infoseek serves as a
member of the Board of Directors or Compensation Committee of any entity that
has one or more executive officers serving as a member of Infoseek's Board of
Directors or Compensation Committee.
107
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Infoseek common stock as of February 5, 1999 (except as otherwise
noted) by (i) each director of Infoseek, (ii) Infoseek's Chief Executive
Officer and each of the four other most highly compensated executive officers
of Infoseek during the nine month fiscal period ended October 3, 1998, (iii)
all directors and executive officers of Infoseek as a group, and (iv) all
those known by Infoseek to be beneficial owners of more than five percent of
outstanding shares of Infoseek common stock. This table is based on
information provided to Infoseek or filed with the Securities and Exchange
Commission by Infoseek's directors, executive officers and principal
stockholders. Unless otherwise indicated in the footnotes below, and subject
to community property laws where applicable, each of the named persons has
sole voting and investment power with respect to the shares shown as
beneficially owned.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Number of Shares Infoseek
Beneficial Owner Beneficially Owned(1) Common Stock
---------------- --------------------- -------------
<S> <C> <C>
Steven T. Kirsch(2)....................... 5,496,980 8.99%
Harry M. Motro(3)......................... 511,915 *
Matthew J. Stover(4)...................... 164,384 *
John E. Zeisler(5)........................ 72,654 *
L. William Krause(6)...................... 19,375 *
Leslie E. Wright(7)....................... 76,927 *
Beth A. Haggerty(8)....................... 78,622 *
Barak Berkowitz(9)........................ 69,928 *
Patrick J. Naughton(10)................... 460,429 *
John Nauman(11)........................... 142,610 *
Andrew E. Newton(12)...................... 514,351 *
Steven Bornstein(13)...................... 0 0
Robert Iger(13)........................... 0 0
Jake Winebaum(13)......................... 0 0
The Walt Disney Company(14)............... 26,771,358(15) 43.77%
All directors and executive officers as a
group (14 persons)(16)................... 7,608,175 12.18%
</TABLE>
- --------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, the aggregate number of shares of common stock subject to options
held by that person that are currently exercisable or exercisable within
60 days of November 30, 1998 are deemed outstanding. Shares issuable
pursuant to such options are deemed outstanding for computing the
percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. To
Infoseek's knowledge, except as set forth in the footnote to this table
and subject to applicable community property laws, each party named in
the table has sole voting and investment power with respect to the shares
set forth opposite such party's name. The address for each of Messrs.
Kirsch, Motro, Stover, Zeisler, Krause, Wright, Berkowitz, Nauman, Newton
and Ms. Haggerty is as follows: c/o Infoseek Corporation, 1399 Moffett
Park Drive, Sunnyvale, California 94089. The address for Mr. Naugton is
as follows: c/o Starwave Corporation, 13810 S.E. Eastgate Way, Suite 400,
Bellevue, Washington 98005. The address for each of Messrs. Bornstein,
Iger and Winebaum is as follows: c/o The Walt Disney Company, 500 South
Buena Vista Street, Burbank, California 91521.
(2) Represents 5,488,855 shares held in the name of trusts for the benefit of
Mr. Kirsch and his family members. Includes 8,125 shares issuable
pursuant to stock options that may be exercised within 60 days after
February 5, 1999.
(3) Includes 510,415 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999.
(4) Includes 15,000 shares issuable pursuant to stock options held in the
name of Mr. Stover for the benefit of Bell Atlantic Corporation which may
be exercised within 60 days after February 5, 1999, of which 10,313
shares
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<PAGE>
would be subject to Infoseek's right of repurchase. Also includes 149,384
shares held by Bell Atlantic Electronic Commerce Services, Inc., 35
Village Road, Middleton, Massachusetts 01949. Mr. Stover disclaims
beneficial ownership of such shares.
(5) Includes 58,437 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999, of which 14,063 shares
would be subject to Infoseek's right of repurchase.
(6) Includes 15,000 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999, of which 13,125 shares
would be subject to Infoseek's right of repurchase.
(7) Includes 76,927 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999.
(8) Represents 1,122 shares held in the name of Ms. Haggerty's spouse.
Includes 77,500 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999.
(9) Includes 68,749 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999.
(10) Includes 402,404 shares which are issuable pursuant to stock options
which may be exercised within 60 days of February 5, 1999.
(11) Includes 28,020 shares which are issuable pursuant to stock options which
may be exercised within 60 days after February 5, 1999.
(12) Includes 37,812 shares which are issuable pursuant to stock options which
may be exercised within 60 days after February 5, 1999.
(13) Based on his employment as an officer of Disney or its affiliates, such
director may be deemed the owner of the shares held by Disney as
indicated in the chart above. However, each such director disclaims
beneficial ownership of Disney's shares.
(14) Includes both The Walt Disney Company and its wholly owned subsidiary,
Disney Enterprises, Inc. For federal securities law purposes, The Walt
Disney Company is deemed to have investment and voting power over shares
of Infoseek common stock held by itself as well as by Disney Enterprises,
Inc. In connection with the governance agreement between Infoseek and
Disney, Disney has the right to purchase shares of Infoseek common stock
sufficient to maintain an approximately 43.0% ownership interest in
Infoseek as well as a warrant to purchase additional shares of Infoseek
common stock in certain circumstances. In connection with this right,
Disney has the right to purchase 299,182 shares of common stock and an
immediately exercisable warrant to purchase 104,366 shares of common
stock in connection with the issuance of shares in the acquisition of
Quando, and the right to purchase an immediately exercisable warrant to
purchase 263,845 shares of common stock resulting from option issuances
by Infoseek from June 18 to December 18, 1998. All of such shares are
included for beneficial ownership purposes.
(15) Does not include 16,019,182 shares that Disney may purchase pursuant to a
warrant Disney holds which is not exercisable within 60 days unless
certain contingencies principally outside Disney's control occur.
(16) Includes 1,304,482 shares issuable pursuant to stock options that may be
exercised within 60 days after February 5, 1999, including those options
identified in footnotes (2) through (13).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Disney
Infoseek and Disney entered into a number of business transactions in
connection with Infoseek's acquisition of Starwave. For a full description of
such transactions as well as ongoing relationships and transactions, see
"Business--Relationship with Disney" and "Management's Discussion and Analysis
of Financial Results and Results of Operations--Infoseek Overview--Disney
Transaction."
Starwave
Pursuant to a hosting agreement between Starwave and Disney Online, a
subsidiary of Disney, Starwave provides Internet hosting services for
"Disney's Daily Blast," an online service of Disney Online, in exchange for
monthly payments from Disney Online to Starwave of $125,000. The hosting
agreement expires April 8, 1999. Pursuant to a software license agreement
between Starwave and Disney Online Starwave licenses certain Internet
109
<PAGE>
site development and production software to Disney Online in exchange for cash
license fees in amounts specified in the agreement for each type of licensed
technology. The software license agreement is terminable by Disney at any time
upon 30 days' notice.
Netscape
Since March 1995, Infoseek's service has been listed as a navigational
service on the Netscape Web page accessible via the "NetSearch" button.
Through April 30, 1998, Infoseek's agreement with Netscape provided for
payments up to $10,000,000 in cash and $2,500,000 in reciprocal advertising to
be one of four non-exclusive premiere providers of navigational services along
with Excite, Lycos, and Yahoo. The Netscape arrangement was subsequently
extended through May 31, 1998.
As of June 1, 1998, Infoseek entered into a one-year agreement with Netscape
with terms that provide for Infoseek to pay, based on impressions delivered,
up to an aggregate of $12,500,000 in cash to be one of the six non-exclusive
premier providers of navigational services along with Excite, Netscape, Lycos,
Alta Vista, and LookSmart. Under terms of the agreement, Infoseek will receive
15% of premiere provider rotations--the pages served to visitors who have not
selected a preferred provider. The payments to Netscape are being recognized
ratably over the term of the agreement. In November 1998, Infoseek and
Netscape renegotiated the terms of the June agreement to provide for the
purchase of 5% of Netscape's available search traffic beginning January 11,
1999 and through the duration of the agreement which terminates May 31, 1999.
Pages sourced from Netscape have declined from 30% a year ago to 13% in June
1998 and 12% in September 1998. A loss of Netscape sourced pages could have an
adverse impact on Infoseek's business, results of operations and financial
condition and prospects. As of September 30, 1998, Infoseek has a cash
commitment ranging from a minimum of $4,150,000 to a maximum of $12,500,000
depending on the level of traffic delivered by Netscape in connection with
this agreement. Mr. Zeisler's wife, Jennifer Bailey, is a Senior Vice
President of Netscape.
Other
Infoseek has granted options to certain of its directors and executive
officers. See "Executive Compensation--Option Grants in Last Fiscal Year" and
"Security Ownership of Certain Beneficial Owners and Management."
110
<PAGE>
Infoseek has entered into indemnification agreements with its executive
officers, directors and certain significant employees. Infoseek's
indemnification agreements will require Infoseek, among other things, to
indemnify such persons against certain liabilities that may arise by reason of
their status or service as directors, executive officers or significant
employees and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of Infoseek in which
indemnification would be required or permitted. Infoseek is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
Infoseek believes that all of the transactions set forth above were made on
terms no less favorable to Infoseek and its affiliates than could have been
obtained from unaffiliated third parties. Any future transactions, including
loans, between Infoseek and any of its officers, directors, affiliates and
principal shareholders will be on terms no less favorable to Infoseek than can
be obtained from unaffiliated third parties. Any such transactions will be
subject to approval of a majority of the Infoseek board of directors,
including a majority of the independent, disinterested directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 above.
2. FINANCIAL STATEMENT SCHEDULES
See Item 14(d) below.
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization, dated as of June 18, 1998,
by and among Infoseek Corporation, a California corporation
("Infoseek California"), the Registrant, Starwave Corporation, a
Washington corporation ("Starwave"), and Disney Enterprises, Inc.,
a Delaware corporation ("DEI").
2.2(1) Form of Merger Agreement by and between the Registrant, Infoseek
California and ICO Acquisition Corp., a California corporation.
2.3(1) Form of Merger Agreement by and between the Registrant, Starwave
and Starwave Acquisition Corp., a Washington corporation.
2.4(2) Agreement and Plan of Reorganization, dated July 24, 1998, by and
among Infoseek, Steelhead Acquisition Corp., an Oregon corporation
("Steelhead"), Quando, Inc., an Oregon corporation ("Quando"),
David Billstrom and William Neuhauser, and with respect to Article
VII only, Stanton R. Koch and U.S. Bank Trust, N.A. (the
"Reorganization Agreement").
2.5(2) Amendment No. 1 to Reorganization Agreement, dated December 7,
1998.
2.6(2) Form of Plan of Merger by and among the Registrant, Steelhead and
Quando.
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant.
4.1(1) Specimen Stock Certificate of the Registrant.
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
4.2(3) Third Amended and Restated Investors' Rights Agreement dated April
19, 1996 among the Registrant and the investors and founders named
therein.
10.1(3) Infoseek Corporation Stock Option Plan, as amended on March 20,
1996, subject to qualification by the State of California.
10.2(3) Form of Offer Letter among the Registrant and its officers.
10.3(1) Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.
10.4(3) Founders Agreement dated February 1, 1994 among the Registrant and
the founders named therein, as amended June 30, 1994.
10.5(3) Employee Stock Purchase Agreement dated March 9, 1996 between the
Registrant and John Nauman.
10.6(2) Assignment and Assumption of Lease, dated May 12, 1998, by and
between Infoseek California and 280, Inc., a California
corporation.
10.7(3) Standard Form of Office Lease dated April 1996 between the
Registrant and Richfield Investment Company.
10.8(3) Software Development and Licensing Master Agreement dated July 8,
1994, as amended on February 13, 1995 and April 24, 1995, between
the Registrant and Applied Computing Systems Institute of
Massachusetts, Inc.
10.9(3) Internet Services and Products Master Agreement dated May 22, 1995
between the Registrant and BBN Planet Corporation.
10.10(3) Software License and Distribution Agreement between the Registrant
and Personal Library Software, Inc. dated June 17, 1994.
10.11(3) XSoft/Infoseek Software Distribution and License Agreement--
Lexicons, dated March 31, 1996 between the Registrant and XSoft, a
division of XEROX Corporation.
10.12(3) Customer Support Program Agreement for Infoseek among the
Registrant and SunService Corporation dated January 1, 1996.
10.13(3) Purchase Orders dated March 21, 1996, February 1, 1996, December
1, 1995, October 25, 1995, October 6, 1995 between the Registrant
and Sun Microsystems, Inc.
10.14(3) Form Consulting Services Agreement among the Registrant and its
consultants.
10.15(3) Online Service Agreement dated February 28, 1995 between the
Registrant and Reuters NewMedia, Inc., as amended January 4, 1996
and April 19, 1996.
10.16(4) Amendment No. 3 to Online Service Agreement between the Registrant
and Reuters NewMedia, Inc., dated October 30, 1996.
10.17(4) Fourth Amendment to the On-Line Directory Agreement between the
Registrant and Reuters NewMedia, Inc., dated August 30, 1996.
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.18(5) Office lease dated March 4, 1997 between the Registrant and Limar
Realty Corp. #8.
10.19(4) Amendment No. 1 to XSoft/Infoseek Software Distribution and
License Agreement, between the Registrant and XSoft, a division of
XEROX Corporation, dated December 16, 1996.
10.20(4) Amendment No. 2 to XSoft/Infoseek Software Distribution and
License Agreement, between the Registrant and XSoft, a division of
XEROX Corporation, dated December 16, 1996.
10.21(6) Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated March 31, 1997.
10.22(3) Amendment No. 3 to Software Development and Licensing Master
Agreement between the Registrant and Applied Computing Systems
Institute of Massachusetts, Inc. dated March 18, 1996.
10.23(7) Amendment No. 1 and 2 to Office Lease dated March 4, 1997 between
the Registrant and Limar Realty Corp.
10.24(1) Common Stock and Warrant Purchase Agreement by and between the
Registrant and The Walt Disney Company, a Delaware corporation.
10.25(1) Registrant Common Stock Warrant.
10.26(1) Form of The Walt Disney Company Promissory Note.
10.27(1) Form of the Registrant's Directors' and Officers' Indemnification
Agreement.
10.28(1) Form of Registration Rights Agreement by and among the Registrant,
DEI and The Walt Disney Company.
10.29(1) Form of Tax Sharing Agreement by and among the Registrant and The
Walt Disney Company.
10.30(1) Governance Agreement by and among the Registrant, The Walt Disney
Company and DEI.
10.31(1) License Agreement by and between DEI and Infoseek California.
10.32(1) Licensing and Services Option Agreement by and between DEI and
Infoseek California.
10.33(1) Product Management Agreement by and between DEI and Infoseek
California.
10.34(1) Promotional Service Agreement by and between American Broadcasting
Companies, Inc. and Infoseek California.
10.35(1) Representation Agreement by and among ESPN/Starwave Partners, a
New York General Partnership ("ESPN Partners"), Starwave and the
Registrant.
10.36(1) Representation Agreement by and among ABC/Starwave Partners, a New
York General Partnership ("ABC News Partners"), Starwave and the
Registrant.
10.37(1) Preferred Shares Rights Agreement by and between the Registrant
and BankBoston N.A. Rights Agent (including Form of Certificate of
Designations of Rights, Preferences and Privileges of Series A
Preferred Stock and Form of Rights Certificate).
10.38(1) Amended and Restated ESPN/Starwave Partnership Agreement by and
between ESPN Online Investments, Inc. and Starwave Ventures, a
Washington corporation ("Starwave Partner").
10.39(1) Amended and Restated ESPN/Starwave Management and Services
Agreement by and between ESPN Enterprises Inc., a Delaware
corporation, Starwave and ESPN Starwave Partners.
10.40(1) Amended and Restated ABC News/Starwave Partnership Agreement by
and between DOL Online Investments, Inc., a California
corporation, and Starwave Partner.
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.41(1) Amended and Restated ABC News/Starwave Management and Services
Agreement by and between ABC, Inc., a Delaware corporation,
Starwave and ABC News Partners.
10.42(1) Employment Agreement by and between Starwave and Patrick J.
Naughton.
10.43(1) First Offer Letter Agreement between Disney and Steven T. Kirsch.
10.44(8) Starwave Corporation Revised 1992 Combined Incentive and
Nonqualified Stock Option Plan, Amended and Restated as of March
7, 1995.
10.45(8) Starwave Corporation 1997 Nonqualified Stock Option Plan.
10.46(9) Amended and Restated Infoseek Corporation 1996 Stock Option/Stock
Issuance Plan.
10.47(9) Amended and Restated Infoseek Corporation Employee Stock Purchase
Plan.
10.48 Infoseek Corporation 1998 Employee and Acquisition Nonqualified
Stock Option Plan.
10.49(10) Amended and Restated WebChat Communications, Inc. 1997 Stock
Option Plan.
10.50(2) Quando Secured Promissory Note, dated July 24, 1998.
10.51(2) Agreement of Lease, dated February 20, 1998, by and between Sixth
& Virginia Properties, a Washington General Partnership, and
Starwave.
10.52(2) Lease Agreement, dated March 4, 1992, between Vulcan Northwest,
Inc., a Washington corporation (later assigned to Starwave
Corporation, a Washington corporation) and Sunset Office Limited
Partnership, a Washington limited partnership (later assigned to
Obayashi Corporation, a Japan corporation), as amended December 1,
1998.
10.53(2) Form of Employment and Non-Competition Agreement with David
Billstrom and William Neuhauser.
10.54 Amendment No. 1 to Employment Agreement by and between Starware
and Patrick J. Naughton.
16.1(1) Letter of KPMG LLP regarding change in certifying accountant of
Starwave.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors / Infoseek.
23.2 Consent of PricewaterhouseCoopers LLP / Starwave.
23.3 Consent of KPMG LLP / Starwave.
24.1 Power of Attorney (see Page 116).
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement Form
S-4 (File No. 333-65635) declared effective October 14, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement Form
S-4 (File No. 333-68561) declared effective January 13, 1999.
(3) Incorporated by reference to Infoseek Corporation's, a California
corporation ("Infoseek California's") Registration Statement Form S-1, as
amended, (File No. 333-04142) declared effective June 11, 1996.
(4) Incorporated by reference to Infoseek California's Form S-3, as amended,
(File No. 333-45087) declared effective February 12, 1998.
(5) Incorporated by reference to Infoseek California's Form 10-K for the year
ended December 31, 1997.
(6) Incorporated by reference to Infoseek California's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
114
<PAGE>
(7) Incorporated by reference to Infoseek California's Quarterly Report on
Form 10- Q for the quarter ended September 30, 1997.
(8) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67507) declared effective November 18, 1998.
(9) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67517) declared effective November 18, 1998.
(10) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67519) declared effective November 18, 1998.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES:
Valuation and Qualifying Accounts Nine Months Ended October 3, 1998 and
December 31, 1997 and 1996.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Write- Balance at End
Period Expenses Offs of Period
------------ ---------- ------ --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31, 1996... $ 42 $ 651 $(343) $ 350
Year ended December 31, 1997... $350 $ 930 $(300) $ 980
Nine months ended October 3,
1998.......................... $980 $1,045 $(350) $1,675
</TABLE>
115
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Harry M. Motro and Leslie E. Wright, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Transition Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
conforming all that said attorney-in-fact, or his substitute or substitutes,
any do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 16, 1999 Infoseek Corporation
/s/ Harry M. Motro
By: _________________________________
Harry M. Motro
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/ Harry M. Motro President, Chief Executive February 16, 1999
______________________________________ Officer and Director
Harry M. Motro (Principal Executive
Officer)
/s/ Leslie E. Wright Senior Vice President, February 16, 1999
______________________________________ Chief Administrative
Leslie E. Wright Officer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Steven T. Kirsch Chairman of the Board of February 16, 1999
______________________________________ Directors
Steven T. Kirsch
/s/ Steven M. Bornstein Director February 16, 1999
______________________________________
Steven M. Bornstein
/s/ Robert A. Iger Director February 16, 1999
______________________________________
Robert A. Iger
/s/ L. William Krause Director February 16, 1999
______________________________________
L. William Krause
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
--------- ------------------------ ----
<S> <C> <C>
/s/ Matthew J. Stover Director February 16, 1999
______________________________________
Matthew J. Stover
/s/ Jacob J. Winebaum Director February 16, 1999
______________________________________
Jacob J. Winebaum
/s/ John E. Zeisler Director February 16, 1999
______________________________________
John E. Zeisler
</TABLE>
117
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization, dated as of June 18, 1998,
by and among Infoseek Corporation, a California corporation
("Infoseek California"), the Registrant, Starwave Corporation, a
Washington corporation ("Starwave"), and Disney Enterprises, Inc.,
a Delaware corporation ("DEI").
2.2(1) Form of Merger Agreement by and between the Registrant, Infoseek
California and ICO Acquisition Corp., a California corporation.
2.3(1) Form of Merger Agreement by and between the Registrant, Starwave
and Starwave Acquisition Corp., a Washington corporation.
2.4(2) Agreement and Plan of Reorganization, dated July 24, 1998, by and
among Infoseek, Steelhead Acquisition Corp., an Oregon corporation
("Steelhead"), Quando, Inc., an Oregon corporation ("Quando"),
David Billstrom and William Neuhauser, and with respect to Article
VII only, Stanton R. Koch and U.S. Bank Trust, N.A. (the
"Reorganization Agreement").
2.5(2) Amendment No. 1 to Reorganization Agreement, dated December 7,
1998.
2.6(2) Form of Plan of Merger by and among the Registrant, Steelhead and
Quando.
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant.
4.1(1) Specimen Stock Certificate of the Registrant.
4.2(3) Third Amended and Restated Investors' Rights Agreement dated April
19, 1996 among the Registrant and the investors and founders named
therein.
10.1(3) Infoseek Corporation Stock Option Plan, as amended on March 20,
1996, subject to qualification by the State of California.
10.2(3) Form of Offer Letter among the Registrant and its officers.
10.3(1) Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.
10.4(3) Founders Agreement dated February 1, 1994 among the Registrant and
the founders named therein, as amended June 30, 1994.
10.5(3) Employee Stock Purchase Agreement dated March 9, 1996 between the
Registrant and John Nauman.
10.6(2) Assignment and Assumption of Lease, dated May 12, 1998, by and
between Infoseek California and 280, Inc., a California
corporation.
10.7(3) Standard Form of Office Lease dated April 1996 between the
Registrant and Richfield Investment Company.
10.8(3) Software Development and Licensing Master Agreement dated July 8,
1994, as amended on February 13, 1995 and April 24, 1995, between
the Registrant and Applied Computing Systems Institute of
Massachusetts, Inc.
10.9(3) Internet Services and Products Master Agreement dated May 22, 1995
between the Registrant and BBN Planet Corporation.
10.10(3) Software License and Distribution Agreement between the Registrant
and Personal Library Software, Inc. dated June 17, 1994.
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.11(3) XSoft/Infoseek Software Distribution and License Agreement--
Lexicons, dated March 31, 1996 between the Registrant and XSoft, a
division of XEROX Corporation.
10.12(3) Customer Support Program Agreement for Infoseek among the
Registrant and SunService Corporation dated January 1, 1996.
10.13(3) Purchase Orders dated March 21, 1996, February 1, 1996, December
1, 1995, October 25, 1995, October 6, 1995 between the Registrant
and Sun Microsystems, Inc.
10.14(3) Form Consulting Services Agreement among the Registrant and its
consultants.
10.15(3) Online Service Agreement dated February 28, 1995 between the
Registrant and Reuters NewMedia, Inc., as amended January 4, 1996
and April 19, 1996.
10.16(4) Amendment No. 3 to Online Service Agreement between the Registrant
and Reuters NewMedia, Inc., dated October 30, 1996.
10.17(4) Fourth Amendment to the On-Line Directory Agreement between the
Registrant and Reuters NewMedia, Inc., dated August 30, 1996.
10.18(5) Office lease dated March 4, 1997 between the Registrant and Limar
Realty Corp. #8.
10.19(4) Amendment No. 1 to XSoft/Infoseek Software Distribution and
License Agreement, between the Registrant and XSoft, a division of
XEROX Corporation, dated December 16, 1996.
10.20(4) Amendment No. 2 to XSoft/Infoseek Software Distribution and
License Agreement, between the Registrant and XSoft, a division of
XEROX Corporation, dated December 16, 1996.
10.21(6) Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated March 31, 1997.
10.22(3) Amendment No. 3 to Software Development and Licensing Master
Agreement between the Registrant and Applied Computing Systems
Institute of Massachusetts, Inc. dated March 18, 1996.
10.23(7) Amendment No. 1 and 2 to Office Lease dated March 4, 1997 between
the Registrant and Limar Realty Corp.
10.24(1) Common Stock and Warrant Purchase Agreement by and between the
Registrant and The Walt Disney Company, a Delaware corporation.
10.25(1) Registrant Common Stock Warrant.
10.26(1) Form of The Walt Disney Company Promissory Note.
10.27(1) Form of the Registrant's Directors' and Officers' Indemnification
Agreement.
10.28(1) Form of Registration Rights Agreement by and among the Registrant,
DEI and The Walt Disney Company.
10.29(1) Form of Tax Sharing Agreement by and among the Registrant and The
Walt Disney Company.
10.30(1) Governance Agreement by and among the Registrant, The Walt Disney
Company and DEI.
10.31(1) License Agreement by and between DEI and Infoseek California.
10.32(1) Licensing and Services Option Agreement by and between DEI and
Infoseek California.
10.33(1) Product Management Agreement by and between DEI and Infoseek
California.
10.34(1) Promotional Service Agreement by and between American Broadcasting
Companies, Inc. and Infoseek California.
10.35(1) Representation Agreement by and among ESPN/Starwave Partners, a
New York General Partnership ("ESPN Partners"), Starwave and the
Registrant.
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.36(1) Representation Agreement by and among ABC/Starwave Partners, a New
York General Partnership ("ABC News Partners"), Starwave and the
Registrant.
10.37(1) Preferred Shares Rights Agreement by and between the Registrant
and BankBoston N.A. Rights Agent (including Form of Certificate of
Designations of Rights, Preferences and Privileges of Series A
Preferred Stock and Form of Rights Certificate).
10.38(1) Amended and Restated ESPN/Starwave Partnership Agreement by and
between ESPN Online Investments, Inc. and Starwave Ventures, a
Washington corporation ("Starwave Partner").
10.39(1) Amended and Restated ESPN/Starwave Management and Services
Agreement by and between ESPN Enterprises Inc., a Delaware
corporation, Starwave and ESPN Starwave Partners.
10.40(1) Amended and Restated ABC News/Starwave Partnership Agreement by
and between DOL Online Investments, Inc., a California
corporation, and Starwave Partner.
10.41(1) Amended and Restated ABC News/Starwave Management and Services
Agreement by and between ABC, Inc., a Delaware corporation,
Starwave and ABC News Partners.
10.42(1) Employment Agreement by and between Starwave and Patrick J.
Naughton.
10.43(1) First Offer Letter Agreement between Disney and Steven T. Kirsch.
10.44(8) Starwave Corporation Revised 1992 Combined Incentive and
Nonqualified Stock Option Plan, Amended and Restated as of March
7, 1995.
10.45(8) Starwave Corporation 1997 Nonqualified Stock Option Plan.
10.46(9) Amended and Restated Infoseek Corporation 1996 Stock Option/Stock
Issuance Plan.
10.47(9) Amended and Restated Infoseek Corporation Employee Stock Purchase
Plan.
10.48 Infoseek Corporation 1998 Employee and Acquisition Nonqualified
Stock Option Plan.
10.49(10) Amended and Restated WebChat Communications, Inc. 1997 Stock
Option Plan.
10.50(2) Quando Secured Promissory Note, dated July 24, 1998.
10.51(2) Agreement of Lease, dated February 20, 1998, by and between Sixth
& Virginia Properties, a Washington General Partnership, and
Starwave.
10.52(2) Lease Agreement, dated March 4, 1992, between Vulcan Northwest,
Inc., a Washington corporation (later assigned to Starwave
Corporation, a Washington corporation) and Sunset Office Limited
Partnership, a Washington limited partnership (later assigned to
Obayashi Corporation, a Japan corporation), as amended December 1,
1998.
10.53(2) Form of Employment and Non-Competition Agreement with David
Billstrom and William Neuhauser.
10.54 Amendment No. 1 to Employment Agreement by and between Starware
and Patrick J. Naughton.
16.1(1) Letter of KPMG LLP regarding change in certifying accountant of
Starwave.
21.1(2) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors / Infoseek.
23.2 Consent of PricewaterhouseCoopers LLP / Starwave.
23.3 Consent of KPMG LLP / Starwave.
24.1 Power of Attorney (see Page 116).
27.1 Financial Data Schedule.
</TABLE>
120
<PAGE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement Form
S-4 (File No. 333-65635) declared effective October 14, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement Form
S-4 (File No. 333-68561) declared effective January 13, 1999.
(3) Incorporated by reference to Infoseek Corporation's, a California
corporation ("Infoseek California's") California's Registration Statement
Form S-1, as amended, (File No. 333-04142) declared effective June 11,
1996.
(4) Incorporated by reference to Infoseek California's Form S-3, as amended,
(File No. 333-45087) declared effective February 12, 1998.
(5) Incorporated by reference to Infoseek California's Form 10-K for the year
ended December 31, 1997.
(6) Incorporated by reference to Infoseek California's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
(7) Incorporated by reference to Infoseek California's Quarterly Report on
Form 10- Q for the quarter ended September 30, 1997.
(8) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67507) declared effective November 18, 1998.
(9) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67517) declared effective November 18, 1998.
(10) Incorporated by reference to the Registrant's Form S-8 (File No. 333-
67519) declared effective November 18, 1998.
121
<PAGE>
Exhibit 10.48
INFOSEEK CORPORATION
1998 EMPLOYEE AND ACQUISITION NONQUALIFIED STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Employee and Acquisition
--------------------
Nonqualified Stock Option Plan are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees and Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board in
---------
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Infoseek Corporation, a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, excluding Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option grant. The Notice of Grant
is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant to the
------
Plan, that is not intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code and the regulations promulgated thereunder.
(q) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(r) "Option Exchange Program" means a program whereby outstanding
-----------------------
options are surrendered in exchange for options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option.
--------------
-2-
<PAGE>
(t) "Optionee" means the holder of an outstanding Option granted under
--------
the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1998 Employee and Acquisition Nonqualified Stock
----
Option Plan.
(w) "Service Provider" means an Employee, excluding an Officer or
----------------
Director.
(x) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,000,000 (one million) Shares. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
--------------------------
(a) Administration. The Plan shall be administered by (i) the Board or
--------------
(ii) a Committee, which committee shall be constituted to satisfy Applicable
Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
-3-
<PAGE>
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any Option or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(xi) to modify or amend each Option (subject to Section 14(b) of
the Plan), including the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for in the
Plan;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option previously granted by
the Administrator;
(xiii) to determine the terms and restrictions applicable to
Options;
(xiv) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option that number of Shares having a Fair Market Value equal to the
amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers; provided,
-----------
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Officers and Directors.
-4-
<PAGE>
6. Limitation. Neither the Plan nor any Option shall confer upon an
----------
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for ten (10) years, unless sooner terminated
under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
-5-
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for sixty (60) days following the Optionee's termination. If,
on the date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not
-6-
<PAGE>
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Non-Transferability of Options. Unless determined otherwise by the
------------------------------
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
----------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
-7-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock, immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise
-8-
<PAGE>
between the Optionee and the Administrator, which agreement must be in writing
and signed by the Optionee and the Company. Termination of the Plan shall not
affect the Administrator's ability to exercise the powers granted to it
hereunder with respect to options granted under the Plan prior to the date of
such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-9-
<PAGE>
INFOSEEK CORPORATION
1998 EMPLOYEE AND ACQUISITION NONQUALIFIED STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _____________________________
Date of Grant _____________________________
Vesting Commencement Date _____________________________
Exercise Price per Share $____________________________
Total Number of Shares Granted _____________________________
Total Exercise Price $____________________________
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: _____________________________
Vesting Schedule:
----------------
Subject to the Optionee continuing to be a Service Provider on such dates,
this Option shall vest and become exercisable in accordance with the following
schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48th of the Shares subject to the Option shall
vest each month thereafter.
Termination Period:
------------------
This Option may be exercised for 60 days after Optionee ceases to be a
Service Provider. Upon the death or Disability of the Optionee, this Option may
be exercised for such longer period as
<PAGE>
provided in the Plan. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby
---------------
grants to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of
-2-
<PAGE>
surrender, and (ii) have a Fair Market Value on the date of surrender equal to
the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
----------------
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
---------------------
income tax liability upon exercise of an NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for at
---------------------
least one year, any gain realized on disposition of the Shares will be treated
as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN
DO
-3-
<PAGE>
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE INFOSEEK CORPORATION
- --------------------------------- --------------------------------------
Signature By
- --------------------------------- --------------------------------------
Print Name Title
- ---------------------------------
Residence Address
- ---------------------------------
-4-
<PAGE>
EXHIBIT A
---------
INFOSEEK CORPORATION
1998 EMPLOYEE AND ACQUISITION NONQUALIFIED STOCK OPTION PLAN
EXERCISE NOTICE
Infoseek Corporation
1399 Moffett Park Drive
Sunnyvale, California 94089
Attention: Stock Administrator
1. Exercise of Option. Effective as of today, ________________, 199__,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Infoseek Corporation (the "Company") under
and pursuant to the 1998 Employee and Acquisition Nonqualified Stock Option Plan
(the "Plan") and the 1998 Employee and Acquisition Nonqualified Stock Option
Agreement dated, 19___ (the "Option Agreement"). The purchase price for the
Shares shall be $, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire
<PAGE>
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof, and may not be modified
adversely to the Purchaser's interest except by means of a writing signed by the
Company and Purchaser. This agreement is governed by the internal substantive
laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER INFOSEEK CORPORATION
- ------------------------------------ ---------------------------------------
Signature By
- ------------------------------------ ---------------------------------------
Print Name Title
---------------------------------------
Date Received
Address: --------------------------- Address: 1399 Moffett Park Drive
------- Sunnyvale, California 94089
---------------------------
---------------------------
-2-
<PAGE>
EXHIBIT 10.54
January 5, 1999
Patrick Naughton
c/o Starwave Corporation
13810 SE Eastgate Way
Bellevue, Washington 98005
Re: Amended Employment Agreement
----------------------------
Dear Patrick:
I am writing you this letter as CEO of Infoseek Corporation. This letter
amends the terms of the employment letter agreement ("Letter Agreement") between
you and Starwave Corporation dated March 28, 1997, as follows:
1. As of January 5, 1999, the Letter Agreement shall be deemed amended to be
between you and Infoseek Corporation ("Employer") and you are recognized as
an employee of Infoseek Corporation from that date forward.
2. The following second paragraph is hereby added to Section 4 of the Letter
Agreement:
As of November 19, 1998, the Infoseek Board of Directors approved a grant
of non-qualified options pursuant to the 1996 Stock Option/Stock Issuance
Plan to acquire 92,782 Infoseek shares exercisable at $32.25. On January
5, 1999, you were given a grant of 158,718 Infoseek options exercisable at
$46.875 per share and on January 15, 1999, you were given a grant of
150,000 Infoseek options exercisable at $ 71.375 per share pursuant to the
1998 Employee and Acquisition Nonqualified Stock Option Plan and each such
grant is subject to the Infoseek Board of Directors approval. All such
shares shall vest according to the plan and the Stock Option Agreement
reflecting such grant at the rate of 25% shares vesting one year from the
date of the grant and monthly thereafter at a rate of 1/48 per month for
the next 36 months.
3. Section 5 of the Letter Agreement is deleted in its entirety and hereby
replaced with the following:
Title
-----
You are being employed hereunder in the position of Executive Vice-
President, Product Group (or similar title). In such a position, you will
report to Harry Motro, the CEO of Employer (or his successor). Your
position may be changed to the position of President of Infoseek
Corporation, reporting to Harry Motro, the CEO of Employer (or his
successor), without any increase in compensation, at any time at the
discretion of the Board of Directors.
<PAGE>
Page 2
4. Section 10 of the Letter Agreement is hereby deleted in its entirety.
5. You agree to sign Infoseek's Employee Confidentiality and Intellectual
Property Agreement, which is attached. As your employment with Infoseek is
contingent upon signing this Agreement please read, sign and return this
form to me.
6. All other terms and conditions of the Letter Agreement as amended hereby
shall remain in full force and effect.
If the foregoing accurately reflects our mutual agreement, please sign
where indicated. The respective parties may sign this Amendment in
counterparts.
INFOSEEK CORPORATION
By: /s/ Harry M. Motro
----------------------------
Harry M. Motro
Title: Chief Executive Officer
EMPLOYEE
/s/ Patrick Naughton
-------------------------------
Patrick Naughton
c/o Starwave Corporation
13810 SE Eastgate Way
Bellevue, Washington 98005
AGREED TO: STARWAVE CORPORATION
By: /s/ Harry M. Motro
----------------------------
Harry M. Motro
Title: Chief Executive Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-70939, 333-67507, 333-67517 and 333-67519) pertaining to
the Amended and Restated Quando 1994 Stock Option Plan, the Starwave
Corporation Revised 1992 combined Incentive and Nonqualified Stock Option
Plan, Amended and Restated as of March 7, 1995, the 1998 Employee Acquisition
Nonqualified Stock Option Plan and the Infoseek Corporation Amended and
Restated 1996 Stock Option/Stock Issuance Plan; Infoseek Corporation Amended
and Restated Employee Stock Purchase Plan; Amended and Restated Webchat
Communications, Inc. 1996 Stock Option Plan of Infoseek Corporation of our
report dated January 20, 1999, with respect to the consolidated financial
statements of Infoseek Corporation included in the Annual Report (Form 10-K)
for the nine months ended October 3, 1998.
Our audits also included the financial statement schedule of Infoseek
Corporation for the nine months ended October 3, 1998 and for each of the two
years in the period ended December 31, 1997 listed in Item 14(a). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
February 11, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-70939, 333-67519, 333-67517 and 333-67507) of
Infoseek Corporation of our report dated November 18, 1998 relating to the
financial statements of Starwave Corporation as of October 4, 1998 and
September 28, 1997 and for the year ended October 4, 1998 and the nine months
ended September 28, 1997, appearing in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
February 10, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Starwave Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 333-67507, 333-67517, 333-67519 and 333-70939) on Form S-8 of Infoseek
Corporation of our report dated February 7, 1997, with respect to the balance
sheet of Starwave Corporation as of December 31, 1996, and the related
statements of operations, shareholders' deficit, and cash flows for the year
then ended, which report appears in the September 30, 1998 annual report on
Form 10-K of Infoseek Corporation.
/s/ KPMG LLP
Seattle, Washington
February 10, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-03-1998
<CASH> 628
<SECURITIES> 51,240
<RECEIVABLES> 6,942
<ALLOWANCES> (1,675)
<INVENTORY> 0
<CURRENT-ASSETS> 80,146
<PP&E> 28,850
<DEPRECIATION> (13,480)
<TOTAL-ASSETS> 101,656
<CURRENT-LIABILITIES> 31,958
<BONDS> 0
0
0
<COMMON> 121,292
<OTHER-SE> (54,575)
<TOTAL-LIABILITY-AND-EQUITY> 101,656
<SALES> 50,715
<TOTAL-REVENUES> 50,715
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (517)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,694)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
